LONDON – Britain’s struggling currency will not regain its losses against the U.S. dollar anytime soon as steep interest rate increases from the Bank of England fail to offset an expected recession and increased government spending, a Reuters poll found.
Liz Truss, appointed prime minister on Tuesday, faces a daunting list of problems, steering Britain through a likely lengthy recession and an energy crisis that threatens the finances of millions of households and businesses.
Adding to the woes of indebted households facing soaring costs, the Bank of England is expected to lift borrowing costs by another bumper 50 basis points next month having already raised Bank Rate from 0.10 percent to 1.75 percent.
On the flip side, the dollar was expected to benefit from U.S. interest rate rises, an economy outperforming its peers and its safe-haven appeal.
Sterling, down about 15 percent this year and wallowing around 2-1/2 year lows against the dollar, was expected to hover near Tuesday’s $1.16 level in one and three months time, the Sept. 1-6 poll of nearly 60 foreign exchange strategists predicted.
“Recent sterling price action has been striking partly for its resemblance to some emerging markets – higher inflation, higher rates, and a falling currency,” noted Goldman Sachs.
“Our baseline assumption is that the most rapid phase of Sterling underperformance is now behind us.”
In six months the pound will have risen to $1.18 and in a year to $1.23, the poll found, still far short of the $1.35 it started 2022 around.
But when asked what rate the lowest the pound would fall to within the next three months the median response was $1.14. If it does go below $1.1413 it would be its weakest since 1985.
“Cable in our view is likely to weaken further as inflation prospects in Britain are quite worrisome,” said Roberto Mialich at UniCredit.
“The Bank of England is likely to hike further but real rates we expect to widen further, to the detriment of sterling.”
Analysts at Deutsche Bank said they expect spending pledges of around 100 billion pounds ($115.26 billion)from Truss, about a quarter of what was spent to tackle the COVID-19 pandemic, which would likely lead to further inflation and the need for the BoE to respond.
Against the common currency the pound will trade broadly flat from where it was on Tuesday. In one month a euro will fetch 85.9 pence and in a year 86.0p, the poll found.
($1 = 0.8676 pounds)