The British currency is facing a challenge: it is trying to minimize the negative post-Brexit consequences and to resist inflation pressure. In this complicated situation, the pound is trying to strengthen
Late Wednesday, on November 10, the pound sank considerably amid post-Brexit consequences. Notably, the UK's exit from the EU took place last year. However, the sides have not reached a compromise on a trade agreement on Northern Ireland yet. After Brexit, the UK postponed the implementation of a number of border checks between Northern Ireland, its part, and Ireland, a member of the EU. It caused an additional imbalance to the British economy. Besides, it is exerting pressure due to a lack of drivers and trucking problems triggered by the COVID-19 pandemic.
The statements of the Irish government, which was concerned about inappropriate actions by the British authorities, made a negative impact on the pound's dynamics. Ireland believes that the United Kingdom can introduce emergency measures unilaterally. The realization of such a scenario could jeopardize relations with Dublin, the European Union and the United States. The Irish government stressed that potential disagreements between the UK and the EU would provoke serious trade disruptions.
On Thursday, November 11, the pound declined slightly, falling to a new 11-month low of 1.3393. At the moment, there is a bearish scenario in the GBP/USD pair, which occurred after the breakdown of 1.3545. Experts believe the pair will continue to maintain a downward trend in the near future. On Thursday morning GBP/USD was near 1.3411, trying to hold the gained positions.
According to currency strategists at ING Bank, the risk of the pound decline is increasing in the short term. Besides, it is stimulated by the tense geopolitical situation. If the UK unilaterally suspends the implementation of some clauses of the Northern Ireland Treaty, mutually beneficial trade will be unlikely.
Inflationary expectations and a potential rate hike associated with it, apply additional pressure on the British pound. The markets focus on the new UK GDP data which is expected to be published today, November 11. According to preliminary data from the country's National Office of Statistics (ONS), UK GDP grew by 6.8% year-on-year and by 1.5% quarter-on-quarter. ONS estimates show that in September the country's industrial production rose by 0.2% in monthly terms and increased by 3.1% in annual terms.
ING representatives believe that the current macroeconomic reports will provide clues to the timing of the first and subsequent rate hikes by the Bank of England. Notably, at the November meeting, where MP issues were discussed, the regulator kept the interest rate at the same level (0.1%). At the same time, the Bank of England admitted the possibility of its rise in the short term. Market participants are inclined to raise the rate in December 2021. However, this issue remains controversial. According to economists, the Bank of England will raise its key rate to 0.5% in the second quarter of 2022. Besides, when inflation hits an all-time high, it will stop it..
Despite the current difficulties, analysts expect the pound to rise in the medium and long terms. Notably, the British pound fell to a five-week low after the Bank of England meeting. At the moment, the pound is in a poor state, which needs to be changed. Experts focus attention to the growth potential of the British currency in the coming months.
