Politics, inflation and recession: the pound weighed down by British ills

Political uncertainty, soaring inflation, probable recession: the ills of the British economy are causing the pound sterling to fall ever lower against the dollar and even against a euro, which is also depressed.

Barometer of the attractiveness of the United Kingdom for international investors, at around 1.16 dollars, the pound is evolving at a level that it had only reached for a week at the start of 2020, in the midst of the Covid-19 shock.

Before that, the British currency had not been sold off so much since 1985.

Many currencies are in trouble against the dollar, galvanized by the stated desire of the US Federal Reserve (Fed) to continue raising its key rates.

The currencies of the Old Continent are also suffering from the war in Ukraine and the energy crisis, with the threat of a total interruption of Russian gas supplies, which are already limited.

But the pound is particularly battered and lost more than 15% against the dollar over one year, even though the Bank of England had started at the end of 2021 to raise its key rates, and signals that it intends to continue this tightening.

Faced with the euro, yet weighed down by the European Central Bank’s difficulties in tightening its monetary policy, the pound has fallen by 2% since the start of the year.

Towards a historic low?

The United Kingdom has the highest inflation of the G7 countries at more than 10% over one year. The Bank of England estimates that it could rise to 13% in October.

Private bank analysts are even more pessimistic: Citi estimates that the peak could reach 18.6% at the start of 2023, while Goldman Sachs evokes 14.8% … But also a disaster scenario at 22%.

Analysts at Capital Economics believe the pound could even hit an all-time low of $1.05 given the toxic cocktail of a likely recession and a central bank focused on fighting inflation and unable to support the economy.

According to them, the BoE will have to stop tightening its monetary policy in the coming months, but will not be able to afford to ease it either because inflation will persist.

The downside risks to the British currency are heightened, they say, as “favorite for Prime Minister Liz Truss has threatened to backtrack on the Brexit deal”.

Boris Johnson’s other candidate for succession, Rishi Sunak, has claimed it would be ‘irresponsible’ to ignore the risk of the market losing faith in the UK as Ms Truss proposes new spending to make in the face of the cost of living crisis.

“This lack of credibility mentioned by Mr. Sunak could result in a further decline of the pound” if Mrs. Truss is elected, also warns Derek Halpenny, analyst at MUFG.

The consequences of leaving the European Union continue to weigh on the currency of the United Kingdom, say economists.

The pound was trading at less than 80 pence to the euro and more than $1.40 on the eve of the Brexit vote. Since then, it has lost more than 20% against the greenback and more than 10% against the single European currency.