Will the Pound get more robust against the dollar?
The Pound Depreciation against the dollar has been unprecedented since 1990. There are several reasons for the Pound depreciation. The economy is in bad condition. The decisions of the Bank of England are the subject of political attacks and criticism. The UK economy heavily relies on domestic demand.
The Pound depreciation against the dollar is a shock for the UK. This shock means that the UK is a country with low growth. The UK is trying to replace access to the EU single market with labour and goods from other countries. In this regard, trade agreements remain a challenge for the UK government. The UK has signed its first agreement with a US state. However, the UK government’s slow approach suggests that negotiations for other arrangements have not progressed. Thus, will the Pound get stronger against the dollar? The
Sterling suffers its worst month since Brexit
According to CNBC (Sep 1 2022), the Sterling in August suffered its sharpest monthly fall against the US dollar since the aftermath of the Brexit referendum. Analysts expect it to ‘plumb new depths. Political uncertainty and a historic cost-of-living crisis weigh heavily on the British currency. Sterling dropped 4.5% against the greenback last month. The Pound also fell nearly 3% against the euro last month.
Will the Pound get stronger against the dollar? Future decline of the Pound
As CNBC says, in a research note, Capital Economics Chief UK Economist Paul Dales says, “We think the Pound will fall from $1.17 now to around $1.05 by the middle of next year. That would be below the levels reached before the 1985 Plaza Accord ($1.09). “It would be below the levels reached after the UK left the ERM in 1992 ($1.43). It would also be below the levels reached during the 2008/09 Global Financial Crisis ($1.38). Besides, it would be below the levels reached after the 2016 Brexit vote ($1.21). It would also be below the levels reached during the 2020 COVID-19 crisis ($1.21),” Dales said.
According to Bloomberg, the Pound will slump to historic lows this year as Britain suffers a winter gas crisis. This is what UBS Group strategists are telling their millionaire clients. They have slashed a forecast for the UK currency to $1.15 in the October-December quarter, down from $1.26. That would nearly match the trough hit when the pandemic rattled global markets in 2020. Sterling has only been lower than that in 1985.
Factors impacting the value of the Pound
One factor impacting the Pound’s value is the relative pace of economic growth in the UK. When the UK economy gets stronger, GBP usually rises. If the British economic growth decreases, the Pound can weaken (Exiap). Analysts say the sterling is also weak because markets are worried about future UK economic growth. The sterling could fall even further after UK economic stagnation predictions and inflation rises (BBC).
Sterling could fall even further, Rabobank head currency strategist Jane Foley says. One of the issues is the shortage of UK labour. Many people left the labour market during the pandemic. Due to a combination of Covid and Brexit, foreign workers who had left did not return (BBC). Thus the issue of shortage of UK labour affects the economy and the Pound’s value. BBC adds that the fall in sterling also happened because of the UK government “aggravating the Northern Ireland protocol. George Godber, a fund manager with Polar Capital, says this.
Will the Pound get more robust against the dollar? Bank of England
According to BBC, the dollar is performing strongly. This is due to US interest rate rises, and investors see it as a safe bet. Rabobank head currency strategist Jane Foley said: “Sterling is still weak on its own. This weakness exists even though the Bank of England has hiked interest rates five times this cycle. The reason is that the market is very concerned about the growth outlook here in the UK”.
As it says in Trading Economics, the latest data showed that inflation in the UK picked up to a fresh 40-year high of 10.1% in July. At its September meeting, financial markets expect the BoE to raise its introductory rate by 50bps to 2.25%. This hike would be the seventh consecutive rate hike, pushing borrowing costs to the highest since 2008.
UK signs first US state-level agreement with Indiana
Access to the single market is one of the core benefits of the United Kingdom’s membership in the European Union. The single market programme started in the mid-1980s. It sought to remove hundreds of remaining barriers to the free movement of goods, persons, services, and capital (Bruegel). The UK has signed the first US state-level agreement with Indiana. Indiana offers UK firms significant opportunities in renewable energy, advanced manufacturing, and pharmaceuticals. The state buys $1.4 billion of goods from the UK (GOV.UK).
Biden raised concerns about the UK’s handling of post-Brexit trade arrangements in Northern Ireland. Thus hopes of a quick deal have faded since US President Joe Biden took office (BBC). Thus Biden’s response presents an adverse reaction to the question, “Will the pound get stronger against the dollar?”.
Final remark
Weak pound means that UK products and services that are sold abroad can become more attractively priced for foreign customers. However, imports such as food become more expensive, and the price of petrol at the pumps rises. It also means that UK holidaymakers get less for their money when buying abroad (BBC). Thus, the Pound depreciation against the Dollar makes life financially difficult for many people in the U.K. Lack of economic growth and political issues such as Brexit have led to the Pound’s depreciation.
As a result of Brexit, the government has lost access to the single market. To compensate for this loss, the government signed agreements with other countries. Such trade agreements have become a challenge for the UK government, and the government has not made much progress. For instance, the US has shown no interest in moving forward with the UK on a free trade agreement. The cost-of-living crisis and depreciation of the Pound have brought about intolerable conditions for most people in Britain. Will the Pound get more robust against the dollar? The answer is “NO” unless a revolution happens in the UK’s political and economic system.
