Morgan Stanley says the British pound is more vulnerable to large capital flows than investors often assume, behaving more like smaller, less liquid currencies such as the Swiss franc or New Zealand dollar than the euro or yen. While $1 billion trades barely move the Japanese or European currencies, the same volume can shift sterling significantly despite it being the world’s fourth most-traded currency.

The bank argues this highlights the dominance of global capital flows over trade in driving exchange rates. Analysts noted that sterling’s lower liquidity is also evident in varying price impacts depending on trade timing and location, with late London deals showing more influence. Their study, based on simulated client orders during peak market hours, suggests investors are the main force moving the pound.

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The note from Morgan Stanley comes via Bloomberg.