It’s an idea that was once thought impossible. While the British pound traded at its weakest level against the dollar in more than two years on Friday, some economists expect it could move closer to 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 expects the British currency to trade as high as $1.05 by mid-2023 as Europe’s energy crisis continues to weigh on the British economy.
If proven correct, it would leave the British pound at its weakest level against the dollar since the Plaza Accord, a multinational accord that allowed the US dollar to weaken, was signed in September 1985, according to Dales.
The Dales forecast is rooted in the expectation that the UK and the European Union will slide into a deep recession while inflation remains stubbornly high, preventing the Bank of England from cutting interest rates to ease the pain of British business and consumers. Dales, meanwhile, expects the U.S. economy to slow but avoid recession.
“Our forecast that the energy crisis will push the eurozone and UK economies into recession, while the US gets away with a milder slowdown, suggests that the euro and pound will weaken further against the US dollar,” Dales wrote.
While Dale’s 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 exposure to the pound and refrain from “bottom fishing” as it expects the pound to trade as low as $1.07 by the end of the fourth quarter.
“The UK economy is struggling under the weight of rising inflation, mainly driven by high gas prices. Against this backdrop, the Bank of England’s interest rate hike offers little support for the pound,” Clemens Dumoncelle and Dean Turner of UBS warned.
Already, the pace of the pound’s decline over the past month has surprised some on Wall Street. In forecasts published earlier this summer, the currency strategy team at Standard Chartered Bank expected the pound to fall to $1.18 in the coming months.
But from Friday the British currency
has 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 market turmoil caused by the onset of the COVID-19 pandemic.
Stephen Englander, global head of G-10 currency strategy at Standard Chartered, said he expected the pound was likely to 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 likely performance in the UK looking forward. It’s in a neighborhood that’s slowing down a lot, partly because of inflation issues and partly because of structural issues,” Englander said.
“But you have to have really good luck on the US side and really bad luck on the UK side to see parity,” he added.
Of course, if this were to happen, the pound would not be the first major European currency to reach parity with the dollar. the euro
traded at parity with the dollar on Friday after falling below that level in July for the first time in 20 years.