The pound sterling's downturn against the US dollar has accelerated amid bearish sentiment in the market. However, analysts expect the British currency to recover its losses soon.
Yesterday, both the pound sterling and the euro suffered serious losses, with EUR falling below parity with USD and GBP tumbling to the lowest level since March 2020. On Thursday, July 14, the pound sterling lost 1.1% and slumped below the key psychological level of 1.1800. GBP tested the new 27-month low late on Thursday and traded at 1.1761. The pound recovered some of its losses afterwards, rising to 1.1795 and reaching 1.1841 early on Friday, July 15. However, the UK currency failed to move above this level.
Currently, the pound sterling is in a bearish trend and could fall to 1.1800 or lower. According to Scotiabank, GBP could sink to a critical level of 1.1500. However, this scenario is unlikely, and GBP can possibly recover in the long term.
The pound sterling was pushed down by the dollar rally accelerating and rising risk-off sentiment among investors. Amid recession fears, market players increased their exposure to USD, ignoring other currencies. As a result, the US dollar surged against the pound sterling and the euro.
The UK currency has found no support in the Bank of England's monetary tightening. GBP tumbled in 2022 despite policy measures by the regulator, as investors shifted to safe-haven currencies such as USD. The pound sterling remains at the sidelines, trying to regain balance and consolidate its positions.
The Bank of England is considering another interest rate hike in August. Earlier, BoE's Governor Andrew Bailey and chief economist Huw Pill spoke in favor of a 0.25% increase. However, their position could change at this point.
Currently, Andrew Bailey holds a position matching the decision of the Bank of England. In June, the UK central bank stated it will act decisively if prices and wages increase amid imported inflation shocks. The economic situation will deteriorate if inflation does not return to the target level, Bailey said.
According to the current data, inflation in the UK increased to 9.1% from 9% a month earlier. It is set to reach 11% by the end of 2022. Core inflation has declined to 5.9% from 6.2% in the previous month. Market players are concerned about UK economic prospects and are wary about another bout of inflation weighing down on the economy.
The ongoing leadership race in the UK is another bearish factor for GBP. Following the resignation of Boris Johnson, the ruling Conservative Party is undergoing a leadership reshuffle. Several rounds of votes will be held in the coming days, as Tory MPs choose a new prime minister. The uncertainty over PM hopefuls and their economic course has put pressure on the pound sterling.
However, the USD uptrend and the euro's dive to parity have more influence on the pound than the Conservative Party's leadership vote and are more likely to determine the currency's performance in the medium term, analysts say.
