Tommy Wilkes and Dhara Ranasinghe
LONDON (Reuters) – GBP/USD falls to 1985 sparks concerns A sharp decline in discussions culminated in a collapse in confidence in UK assets and a balance of payments crisis.
Fund managers, analysts and ex-policy makers see this as unlikely, but suspect sterling needs to get cheaper before investors return.
The currency fell to as low as $1 on Wednesday as investors worried about the economic outlook. 1407. Sterling has lost nearly % since early June – for the world’s major G05 currency.
Goldman Sachs (NYSE: GS
) expects 2023 the economy to contract by 0.6%.
New UK Prime Minister Liz Truss is also under scrutiny as she prepares to cut taxes and use tens of billions of pounds in extra government borrowing to fund a freeze on consumer energy bills . An energy plan is expected to be released on Thursday.
“The market has moved very quickly over the past few weeks in the face of a relatively bleak economic outlook. That means there will be a recession in the U.K., but the The recession will be deeper.
UK faces economic slowdown The International Monetary Fund (IMF) forecasts economic growth and sustained inflation to exceed any other major economy next year.
“Currency is cheap, but it may need to be cheaper,” Dubell said.
Several economists, including Mohamed El-Erian, predict that the pound will soon hit $1. down 4% from current levels.
Capital Economics sees sterling May test its all-time low near $1.05 March1985 slumped just before G7 powers moved to rein in superdollars
However, the rush to sell UK assets has also been fueled by international developments, including a surge in gas prices that have driven investors And global growth concerns took refuge in the dollar. The euro and the yen also hit multi-decade lows.
Reuters Sept. 1-6 on the near poll*) currency strategists, not so pessimistic. Consensus is for GBP to rise to $1 in 1 and 3 months. 15. Also, GBP/EUR or trade-weighted declines are not that big.
Sterling’s slide has resumed, however, after the 2016 Brexit vote showed the UK was behaving like an emerging market with increasingly volatile currencies.
Many traders dispute the comparison and say trading remains in order and confidence in institutions such as the Bank of England is strong.
Mediolanum’s Diebel said extreme sterling scenarios were discussed, For example because the UK was forced to seek help from the IMF, as it did in 1976, was “alarmist”.
Deutsche Bank (ETR:
August was the worst month on record for some UK bond prices as investors fled. The annual rate of return rose to around 3. 15%, the highest since 16 Level.
Britain is no stranger to balancing payments crisis and sterling devaluation played a role in the period leading up to the end of Conservative rule. When the UK was forced to withdraw from the European Exchange Rate Mechanism, the pound plummeted at 1992.
In a reassuring sign for investors, Britain’s new finance minister, Quasi Kwaten, said on Wednesday that he wanted to reaffirm the independence of the central bank.
Andrew Sentance, a former member of the Bank of England’s rate-setting committee and now a Cambridge econometrics consultant, believes that the balance of payments crisis is a thing of the past and only makes sense if the UK tries to defend its values
But he said the Bank of England, which meets next week, should be more concerned about the fall in the pound than it is now.
“Any dollar-denominated dollar up 14% this year, imported inflation is One problem with inflation, is the squeeze on consumers,” he told Reuters.
Ultimately, the outlook for the pound depends on improving international conditions and whether Truss’ economic policies can limit the depth and duration of the recession.
More expansionary fiscal policy should also mean tighter monetary policy, especially if inflation doesn’t fall. Expectations of a BoE rate hike have soared in recent weeks – investors expect rates to rise from the current 1-year to June peaked at 4.3%. % – but the pound has only weakened.
“If they (the Bank of England) are more forceful in the next few meetings, it will help the pound,” Sentance said.