Market View: September
Sterling has been on a spiralling downward trend against most currency pairs over the course of recent months. This lack of confidence in the Pound has led it to become the worst performing major currency throughout August, and it is now testing yearly lows against both Euro and Dollar.
The cost of living crisis and the potential of a prolonged recession have seen a move away from the pound. The continuing political climate, as well as an economy largely dependent on financial services exports, has allowed GBP to be treated like a riskier minor currency, rather than a safe haven major currency e.g. USD.
But, let us not forget that this problem is not exclusive to the UK – the Eurozone and the US are experiencing similar problems, even if it is hitting the pound harder at present. Recent steady data from the Eurozone as well as an aggressive approach to interest rates from the US Federal Reserve, has helped strengthen their cause.
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Goldman Sachs have predicted that UK inflation could peak at 14.3% and that the economy could contract by 0.6% in 2023. There have been suggestions the pound could drop as low as 1.11 against the Euro and 1.13 against the Dollar in the next three months.
The energy cap was hiked in August and a further hike is expected early next year. Consumers are now facing a tough winter in the UK, which is likely to lead to limited consumer spending. If the public are spending less, the knock on effect filters through to economic data. Markets tend to move on expectation as well as fact, and investors clearly don’t expect the UK economy to perform well anytime soon.
As we know though, expectation and sentiment can change very rapidly – so you can never rule out the pound fighting back. All eyes will now be on the winner of the conservative leadership contest and what plans the new Prime Minister has to tackle the problems set out above. But it is a big task, and if you have a large overseas purchase to make, using GBP, it may be prudent to start looking at the opportunities available to you currently.
Chris Jackson, Head of Corporate FX.