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There is no shortage of troubles for the UK’s economy and currency. Brexit caused a profound shock at first. COVID-19 and its aftermath followed. Then, the budget proposal by the Treasury chief Kwasi Kwarteng around a month ago was, according to many, the last straw on this camel’s back. The Pound tumbled to record lows against the Dollar, a decline that was only halted by an intervention in the bonds market by the Bank of England (BoE).
The GBP depreciates in value against most G7 currencies
With few exceptions, most Sterling Pound (GBP) pairs have not performed well this year. The biggest decline was seen thus far in the GBPUSD despite the recent modest recovery. On Monday the 26th of September this year, the pair reached a record low at 1.03 GBP per USD, which is very close to parity, although it has recovered recently to higher levels. The recovery can continue and you can buy or sell the GBP against other currencies with a renowned broker like easyMarkets, which gives you exchange rate updates in real time.
There are multiple reasons for this decline. The most obvious one is the strength of the Dollar, buoyed by ever increasing interest rates by the Federal reserve. The second biggest one is the poor shape of the UK economy.
The Bank of England intervenes following a drop in bond prices
The troubles of the UK economy and Pound were so big that the Bank of England had to intervene twice in the bond market. “Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability,” the Bank stated. The first intervention was on 28th of September to protect UK pension funds from being severely affected by the decline in long term bonds, a fall that is unprecedented in a country like the UK.
On Monday, September 26, U.K. 10-year index-linked gilt yields rose by 64 basis points, up from 0.64% to 1.28%. Meanwhile, 30-year index-linked gilt prices were down 16% on the day, with yields now at around 1.5%, having been at -1.5% just six months ago.
Prime minister Liz Truss resigns after only 44 days in office
Just a few days ago, the UK’s prime minister Liz Truss announced her resignation after a considerably short time in office. The fact that democracy is working in the UK can bring some relief to the Sterling Pound. Recent moves show that the decline has stopped, at least on some pairs. The recovery of the Pound may continue if the BoE delays its quantitative tightening program that is meant to start soon.
Is the Pound out of the woods?
It remains to be seen whether the recent reversal of the Pound continues. Several factors are at play here. The first is the UK’s long term productivity problem. The second is the issues in the energy markets and the upcoming winter, and how this will impact prices of inputs. It might put a more upward pressure on inflation. The third issue is the historical trend in the GBP. All those drivers, and others, may make an upward move in the Sterling very limited. Despite this, it is ultimately up to market participants to decide whether the currency is out of the woods yet.
