The British pound appears to be unable to be stopped from reaching fresh record lows.
The UK’s economic troubles are getting worse by the day with forecasts of inflation exceeding 18% next year and families throughout the nation set to be forced into energy poverty this winter. Traders generally agree that the Bank of England will be forced to drive the economy into a deep recession and generate significant job losses in order to control pricing pressures.
It’s made it possible for the pound to reach historic lows. The challenges facing the British economy and the future prime minister are highlighted because the currency is trading around US$1.18, fewer than four US cents away from its worst level versus the US dollar since 1985.
Start of a recession
The BOE already predicts a five-quarter recession that will start later this year.
Is there any more harm? Geoff Yu, the senior currency strategist at Bank of New York Mellon Corp., replied “definitely.” “Sterling can’t go back to where it was in the past, at US$1.40 or US$1.45, even if things get better. It will be quite challenging to accomplish that.”
The increase in electricity costs is fueling expectations for rising inflation, which is causing traders to think that the BOE will need to be more aggressive. Money markets currently predict that benchmark interest rates will increase by 4.25% in 2019, the highest level since 2008. Bond yields have also increased as a result, with 10-year rates rising to 2.59%.
Higher rates should theoretically result in a stronger currency. It’s the opposite, though, for the UK at the moment. Investors are of the opinion that additional aggressive increases in borrowing costs, which are necessary to reduce price growth, would worsen Britain’s economic situation relative to that of the US and the euro area.
When the growth-inflation trade-off is this poor, Kit Juckes, chief currency strategist at Societe Generale SA in London, said, “Rates aren’t always going to be adequate to support a currency.”
Last month, UK inflation reached a 40-year high of 10.1% year-over-year, and Citigroup Inc. has predicted that it may surpass 18% in January. According to consulting firm Baringa Partners, more than half of UK homes run the risk of falling into energy poverty this winter due to rising costs.
Here is an overview of the situation in other UK markets:
Yields on UK short-end benchmark bonds — which are the most sensitive to changes in monetary policy — are poised to climb by a record this month. Two-year yields have risen 111 basis points, raising borrowing costs to 2.82%, the highest since the global financial crisis in 2008.
The weaker pound has been a boost to the UK’s big exporters, and the FTSE 100 Index is eking out a 0.3% gain in August. Recession concerns are weighing on smaller companies, however, dragging the FTSE 250 Index 4.6% lower.
Corporate debt gap
Short-dated corporate debt underperformed this month because of inflation fears. The extra yield that investors demand to hold sterling notes instead of euro-denominated debt has widened to the highest level in years.
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Source: Head Topics