Pound faces perfect storm

Investors should hedge for an "existential" sterling crisis as the British currency faces struggles usually seen in emerging markets, according to Bank of America strategists.

The Bank of England continuing to hike interest rates won't be enough to rescue the pound, strategist Kamal Sharma said in a note. Instead, there's a risk the nation's current account deficit, a deterioration of its relationship with the European Union over Northern Ireland and questions around the central bank's credibility combine to create a "perfect storm."

"Whilst not wishing to over-exaggerate GBP's predicament as some kind of 'end-of-days' scenario, we are concerned that the increasing politicization of UK policy undermines the GBP in ways that would appear EM-like," Sharma wrote in a note. "We sense something is changing in the UK, with the BOE increasingly hard to decipher and less transparent; a failure to discuss and acknowledge that Brexit has been a significant headwind to the supply side; and a sense that the BOE is losing control over its mandate."

The BOE has faced political attacks this month over its response to inflation, which is at its fastest rate in four decades. Despite four interest-rate increases since December and money markets bracing for more in each of its next five decisions, the pound is the third-worst performing major currency this year.

"At a point of increased uncertainty over domestic growth, signs of regional fragmentation and Northern Ireland-related risks, the UK will find it increasingly difficult to attract portfolio flows to finance a widening current-account deficit," said Citigroup strategist Vasileios Gkionakis, who recommends betting against the pound versus the euro.

Meanwhile, inflation in the Eurozone hit 8.1 percent, a new high for the 23-year-old single currency regime. Prices rose 0.8 percent on the month, well above estimates, with energy and food posting particularly big increases.