Sterling is a major reserve currency, accounting for 5% of global foreign exchange reserves while the United Kingdom accounts for only 3% of global GDP. But GBP’s reserve currency role could be under threat, according to analysts at Natixis.
“Sterling’s reserve currency role is under threat, particularly since the Brexit referendum, in the face of: The UK’s relatively weak growth; The reduced appeal of the United Kingdom for corporate investment; Awareness of the small size of the UK economy relative to its reserve currency status; Labour force decline, due to the departure of Europeans; And the onset of a vicious circle where because pound sterling is less attractive, it depreciates, which in turn makes it less attractive still.”
“If Sterling’s share of global foreign exchange reserves falls, foreign holders of pounds will become sellers. The market for Sterling will then have to rebalance after this selling shock, which will require a huge depreciation of the Pound: To offset central banks’ sales of GBP; To balance the UK’s current account without capital inflows.”