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Pound suffers worst month since Brexit, analysts expect it to ‘sink to new depths’

The British pound has suffered its worst month since the aftermath of the Brexit referendum, with analysts expecting the pound to fall further as an ‘economic slowdown and political paralysis’ dominate the UK.

Luke McGregor | Bloomberg | Bloomberg | Getty Images

LONDON — The pound suffered its steepest monthly decline against the US dollar in the aftermath of the Brexit referendum in August as political uncertainty and a historic cost of living crisis weigh heavily on the British currency. I was.

The British pound fell 4.5% against the dollar last month and continued its decline on Thursday, ending just below $1.16 by mid-morning in London. The pound also fell nearly 3% against the euro last month.

The UK faces a rapidly worsening cost of living crisis as food and energy prices soar, pushing millions of households into poverty this winter.

Meanwhile, a new prime minister is due to be nominated next week following a vote by Conservative MPs, creating uncertainty over the outlook for fiscal policy.

The energy crisis resulting from Russia’s war in Ukraine is now widely expected to push the eurozone and UK economies into recession, but some economists believe the US’ relatively strong economic position and energy Given their independence, they are advised to avoid the same fate.

Political and economic uncertainty has hit the UK as the divergence will push the euro and pound further down against the dollar, said Paul Dales, chief UK economist at Capital Economics, in a research note on Wednesday. We expect the pound to ‘sink to new depths’ as it continues its asset.

“We believe the pound will fall from $1.17 today to about $1.05 by the middle of next year. That would mean that after the UK exited the ERM in 1992 ($1.43), it would fall to pre-1985 Plaza Accord levels ($1.09). ) during the 2008/09 global financial crisis ($1.38), after the 2016 Brexit vote ($1.21) and during the 2020 COVID-19 crisis ($1.21),” Dales said. says.

“In fact, $1.05 would be a record low. At the same time, inflation, which is likely to prevent the Bank of England from cutting interest rates as soon as financial markets predict, will push us to expect gold coin yields to rise by 10-10 by the end of the year. up and the FTSE 100 drops significantly.”

“Frankly bad”

A weaker sterling tends to boost house prices and international trade, so the depreciation of the UK currency usually has multiple effects.

Sterling weakness 'clearly bad' for UK economy, strategists say

However, Bitcoin Suisse director Giles Keating told CNBC that is not the case this time.

“At the end of the day, I think we’re clearly in a bad place right now because higher import prices lead to inflation,” Keating told CNBC’s “Squawk Box Europe.”

He added that the cushion provided by pandemic-era savings hoarded for middle-income consumers was eroding, removing another support beam from the UK economy in the coming months.

“Looking beyond that, it will depend on what the government does with fiscal policy. Perhaps there will be leaders who will actually put a significant amount of money back into the economy.”

“Economic slowdown and political paralysis.

Former Foreign Minister Liz Truss is expected to beat former Chancellor of the Exchequer Rishi Sunak in the race to become Britain’s next Prime Minister, and faces many challenges.

UK inflation hit 10.1% in July, with the Bank of England forecasting a peak of 13.3% by the end of the year. The national energy price cap was set at £3,564 ($4,128), an 80% annual increase from October, and is set to rise further in early 2023.

Goldman Sachs predicts UK inflation could reach 22% early next year. The biggest fall in real wages on record has already led to widespread strike action across the public and private sectors.

Compounding the pound’s predicament is the continued strength of the US dollar as the dollar index hit a 20-year high last week. DXY is up more than 13% year-to-date.

Skyrocketing UK inflation is likely to rise for years, says Bluebay Asset Management chief information officer

In a research note on Wednesday, UBS strategists expected a near-term rise in the dollar and upgraded the Swiss bank’s currency forecast. UBS now expects the euro to fall to $0.96 and the pound to fall to $1.12 by the end of the year.

UBS has warned that Europe’s energy crisis has no end in sight as European natural gas prices continue to soar, Brent oil prices remain high and the war in Ukraine shows no signs of abating. .

“We maintain our positive outlook on oil next year as supply dynamics continue to point to higher prices,” said UBS strategists.

“Apart from that, economic slowdown and political paralysis are likely to weigh on the British pound. Our FX strategy rates both the euro and the British pound as the least favorable.”

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