The British pound is approaching new record lows, showing the worst performance this week. However, experts suppose that a considerable decrease in the currency does not mean that it will never rise. In the mid term, the British currency has every chance to recover.
At the end of the week, the pound sterling collapsed against the greenback, hitting the lowest level since 1985. According to estimates, the pound sterling has become the main loser compared to other major currencies. Such a decline was caused by the BoE's decision not to raise the benchmark rate by 75 basis points. Against the backdrop, the pound/dollar pair tumbled to the low of 1.1407. The last time the currency reached this level was 37 years ago.
Traders were disappointed by the decision of the regulator that does not see any reason to hurry to raise the key interest rate. This decision was taken just after Liz Truss won the contest to replace Boris Johnson as Conservative Party leader and prime minister. Analysts suppose that a loose monetary policy conducted by the Bank of England may boost the pound sterling in the medium and long term. However, now, the pound sterling has no support.
Liz Truss is planning to remain stuck to the current monetary policy. Nevertheless, traders still hope for a key interest rate hike in the near future. This, in turn, has a positive influence on the British currency. However, experts fear that the currency may break a critically low of 1.1400.
Currency strategists at Nomura suppose that by the end of October, the pound/dollar pair may decline to 1.1000; by the end of 2022, it will slide to 1.0600. In the middle of the week, a massive sell-off was weighing on the pound sterling. Market participants still believe that the currency will rise after a collapse. To prove this, some traders bought the asset, expecting its further rise. Now, the pound sterling is suffering losses. Early on Thursday, the pair was trading at 1.1507
Some analysts believe that political uncertainties in the UK ebbed after Liz Truss became a new prime minister. Changes in the political leadership had a significant influence on the pound sterling. According to BoE Governor Andrew Bailey, the British pound reached its low this week amid the rising dollar, higher gas prices, and uncertainty about monetary policy. Notably, the BoE's monetary policy is the reason for the slump. What is more, the UK economy highly depends on gas prices.
The UK government expects Liz Truss to solve the energy problems and cope with surging inflation. Experts at Nomura think that a short-lived inflation peak, caused by the government's measures of energy support, may force the regulator to give up an idea of higher interest rates. Since the predictions did not come true, the pound sterling slumped. The situation may repeat soon if the BoE does not switch to a hawkish approach.
A mid-term outlook for the currency is very gloomy amid the economic slowdown and the regulator's decision to avoid aggressive measures. Notably, the BoE is thinking over some changes in the monetary policy. According to Catherine Mann, a representative of the regulator, more decisive actions will open the door to a policy rate reversal. The UK's long-term financial position is making investors worry, preventing them from buying the pound sterling. If inflation remains high, the British currency will be under pressure.
