LIVE MARKETS-Sterling stagflation stress?

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STERLING STAGFLATION STRESS?

The pound has shrugged off January's turmoil but Britain’s slow growth, persistent inflation and twin deficits may keep sterling vulnerable, Bank of America said.

With both current account and budget deficits - the second largest in the G7 group of advanced nations behind the U.S. - Britain needs foreigners to fund it.

And overseas investors losing faith could be worse for sterling than the dollar because of the U.S. currency’s global reserve status.

BofA wrote:

“A wider twin deficit combined with rising stagflation risks should be potential warning signs.”

"The UK experience is telling in that it represents an insight into what a perfect storm of large twin deficits and concerns about growth could look like for FX performance.”

“The key ingredient to the recent tumult in UK markets has been concerns that widening deficits come at the same time as stagflation.”

Higher borrowing costs and slowing growth are also taking UK finance minister Rachel Reeves closer to running out of so-called headroom to balance Britain’s budget.

Britain’s self-imposed fiscal rules had placed extra focus on the pound, BofA said, because traders now viewed them as a “notional anchor” for the currency.

(Naomi Rovnick)

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