Even though there has already been a more than 9% decline in the value of the British Pound this year against the US dollar, currency strategists don’t think it is over yet. In fact, they believe that Sterling is in for more pain.
Impact of Bank of England’s Decision
Last week, the Bank of England had its policy meeting during which it announced that the interest rate would be hiked by 25 basis points. This move was a tad more cautious than some of its peers like the Swiss National Bank and the US Federal Bank. The BoE is trying to tame down the rising inflation without slowing down economic growth.
Not only is the UK dealing with the global issues due to the Russia and Ukraine war and problems in the supply chain, but it is also facing domestic political uncertainty, the challenges of Brexit and a major crisis of rising cost of living.
Even though the Bank of England is moving cautiously for now, it has said that it will become more forceful in case of rising inflation. It has already hit the 9% mark and the Monetary Policy Committee believes it will cross the 11% threshold in October. According to analysts, this means that the next hike on the table would be of 50 basis points.
They have also said that this careful approach of the Bank of England is not good for Sterling because it is affecting it negatively. This is evidenced by the fact that the pound has depreciated by more than 5% since March.
Further Suffering for the Pound
Currency experts have said that the pound will continue to underperform, especially as the European Central Bank (ECB) is looking to kick-start a faster monetary policy tightening and also provide a credit backstop. Bearish calls on the pound have gone up and this is primarily because of the high political risks, deteriorating economic performance and the expectation that the Bank of England will not be as aggressive in tightening the policy as it should be.
In April, there had been a 0.3% decline in the UK economy, after it had already shrunk by 0.1% back in March. This is the first back-to-back decline recorded in the economy since the start of 2020. According to the Bank of England, there is a higher risk of recession at the end of 2022 and the start of 2023.
Forex analysts have said that the factors that will have the most impact on Sterling’s fate would be the inflation path and the monetary policy of the Bank of England. They said that the current inflation shows that the MPC should not back off anytime soon when it comes to tightening monetary policy. It is not good for Sterling that the real rates in the United Kingdom are lower than that of the European Union, or the United States. Another factor that will influence Sterling’s fate is the broader risk sentiment. It is likely to remain under pressure against the US dollar, which is considered a safe-haven.