British pound trades near parity with dollar, economists say, as selloff surprises Wall Street

It’s an idea that was once thought impossible. With the British pound trading at its weakest level against the dollar in more than two years on Friday, some economists expect it could reach parity with the greenback by the middle of next year, if not sooner.

In a research note published this week, Capital Economics chief UK economist Paul Dales said he expected the British currency could trade as high as $1.05 by mid-2023 as the energy crisis of Europe continues to hamper the British economy.

If proven correct, that would leave the British pound at its weakest level against the dollar since shortly before the Plaza Accord, a multinational agreement allowing the US dollar to weaken, was signed in September 1985, according to Dales.

Dales’ forecasts are rooted in the expectation that the UK and the European Union will slide into a punishing recession while inflation remains stubbornly high, preventing the Bank of England from cutting interest rates to ease the pain for British businesses and the consumers. Meanwhile, Dales expects the US economy to slow but escape recession.

“Our forecast that the energy crisis will push the eurozone and UK economies into recession, while the US will escape a milder slowdown, suggests that the euro and pound will weaken further against the US dollar,” wrote Dales.

While Dales’ view of the pound is particularly bearish, several megabanks with a strong UK presence also expect a sharp deterioration. Swiss bank UBS, for example, is advising clients to hedge their pound exposure and refrain from “bottom fishing” as it expects the pound could trade as high as $1.07 by the end of the fourth quarter.

“The UK economy is struggling under the weight of rising inflation, mainly due to high gas prices. Against this backdrop, the Bank of England’s rate hikes offer little support for the pound,” warned Clémence Dumoncel and Dean Turner of UBS.

Already, the rate at which the pound has fallen over the past month has caught some on Wall Street by surprise. In forecasts published earlier this summer, Standard Chartered Bank’s currency strategy team expected the pound to fall to $1.18 in the coming months.

But as of Friday, the British currency GBPUSD,
it had already fallen to $1.15, down 0.3% on the day and 15% so far this year, according to FactSet data.

This marks the lowest level for the pound since March 2020, when it briefly fell to $1.14 during the global financial disaster caused by the onset of the COVID-19 pandemic.

Steven Englander, global head of G-10 currency strategy at Standard Chartered, said he expects the pound will likely continue to weaken in the coming months. However, he doesn’t see parity in the cards anytime soon.

“We’re not big fans of the UK’s likely performance looking ahead. It’s in a neighborhood that’s slowing down badly, partly for inflationary issues and partly for structural issues,” Englander said.

“But you’d have to have really good luck on the US side and really bad luck on the UK side to see parity happen,” he added.

Of course, if it does happen, the pound would not be the first major European currency to reach parity with the dollar. The euro EURUSD,
was trading at par with the dollar on Friday after breaking below that level in July for the first time in 20 years.

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