The pound’s slide may not be over, though it’s likely to avoid a collapse to to parity with the dollar, according to Bloomberg Intelligence’s Audrey Childe-Freeman.
She says it’s possible for sterling to fall to $1.15 in the second half of 2022, particularly as a trade dispute with the European Union becomes a greater risk. That’s adding to headwinds that have already driven the currency to the lowest since the pandemic struck after a 12% drop in the past year.
“A trade war between the EU and UK is a scenario that could fuel further significant sterling downside,” wrote Childe-Freeman, BI’s chief G-10 currency strategist, adding that could lead to a test of the $1.20 level. The pound steadied Friday around $1.2470, after sliding to $1.2156 a week ago.
Sterling is still under pressure as the risk of recession in the UK may limit the amount the Bank of England can hike rates to deal with surging inflation. The BOE has adopted a gloomier tone than peers, warning of a prolonged period of stagnation as it grapples with plunging consumer confidence.
The UK government is planning to introduce legislation within weeks to override parts of the Brexit deal it negotiated with the European Union, a move that’s likely to escalate tensions with the bloc.
Still, worries about “once unthinkable” sterling-dollar parity are probably misguided, Childe-Freeman said. That would require a bigger equity rout, disorderly dollar appreciation, or persistent UK stagflation.
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