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The British currency is faced with a problem that the European one has been trying to solve for a long time. On the agenda is the probability of achieving parity with the US currency. This question is relevant for the pound, although more recently it has been in the realm of the unattainable.
At the beginning of this week, the pound showed a significant decline and fell by 1.23%, reaching 1.1897. Experts consider this level to be the lowest since March 2020. In the future, the losses of the pound increased. On Wednesday, July 6, the GBP/USD pair traded at 1.1940, but then headed towards 1.1932. According to analysts at Credit Suisse, consolidating below this level will be a stepping stone for further decline to 1.1500.
A powerful driver of the pound's decline was a major reshuffle in the UK cabinet. Recall that Rishi Sunak, the head of the British Ministry of Finance, and Health Minister Sajid Javid, who disagree with the current policy of Prime Minister Boris Johnson, resigned. Nadim Zahavi is the new Treasury Secretary and Steve Barkley is the new Minister of Health.
Major British ministers, who left their posts, declared Johnson's inability to govern the country taking into account national interests. According to analysts, distrust on the part of ministers can put an end to Johnson's career. It is possible that the incumbent prime minister may retain his post for another year, having survived a vote of no confidence, but the consequences of these political events will be extremely negative for the British economy. In such a situation, investors avoid investing in the pound, creating prerequisites for its subsidence.
Political turmoil in the United Kingdom and fears of a recession are putting pressure on the pound's dynamics. According to Lombard Odier economists, the GBP should fall in the near future. One of the reasons is the deterioration of the current account deficit in the UK, which is happening faster than in Europe. In such a situation, the pound "is more vulnerable to a slowdown in global economic growth," Lombard Odier emphasizes. Adding fuel to the fire is the fact that the increase in interest rates carried out by the Bank of England has ceased to benefit the national currency.
In the current situation, the pound has to make a lot of efforts to stay afloat. On Thursday, July 7, the GBP/USD pair cruised around 1.1943, trying to maintain its gains. Some analysts believe that in the near future the pound will face the question that the euro is now deciding: is it possible to achieve parity with the dollar?
According to Jordan Rochester, an expert at Nomura Bank, the GBP/USD pair is on its way to testing the 1.1000 mark, which may be reached by September. At the same time, currency strategist Nomura allows the pound to fall to parity with the USD.
At the moment, Rochester is holding a short GBP against the dollar, expecting the pound to fall to 1.1800. According to the analyst, the British currency should be inferior to other leading currencies, as the UK economy is seriously stalled. The country has recently raised taxes, while the problems of rising gas prices and the high cost of living have not been resolved.
The current situation has led to a reduction in consumer demand. The icing on the cake was a decline in risk appetite and fears of a global recession. Against this background, the pound "will fall not only to the 1.1800 target," Rochester is certain. Currency strategists at Nomura along with analysts at Credit Suisse expect GBP/USD to pull back to 1.1500 by the end of July. At the end of September, the pair may test the 1.1000 mark, Rochester added.
Current trading conditions suggest that the GBP moves towards 1.00, which is parity with the greenback. The reason for this is the dominance of the dollar, since the US is Europe's key energy export partner. The UK is among these partners and its energy demand is high. In such a situation, trading conditions are in favor of the greenback, but hinder the pound's growth.
Experts consider the deplorable state of the British economy in the face of galloping inflation, which is at its highest over the past 40 years, to be an additional factor in the GBP sinking. According to preliminary estimates, inflation in the United Kingdom will exceed 10% by September. The implementation of such a scenario will plunge the British economy into a protracted recession. The reason is the rising prices for gas and oil, which reached three-month highs.
Recall that the UK economy is largely dependent on energy imports, so amid raw material problems, it may slide into a recession before the end of the year. In such a situation, investors will lose interest in the pound, which will plunge again. At the same time, the GBP/USD pair will remain under pressure for a long time, experts conclude.
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