The British pound (GBP) has plunged to two-year lows against the US dollar. There is a feeling that the pound will be worth just $1.17 in the coming weeks – a price that it hasn’t reached since the commencement of the Covid-19 pandemic. There is genuine weakness in the pound against the dollar and it’s largely due to the market’s bearish view of a recession in the UK economy.
With economic growth stunted and potentially going backwards, inflation still rising due largely to catastrophic wholesale energy costs and increased import costs, there are very few supporters of sterling at present.
The consequences of a weak pound against the dollar
A weak pound not only makes foodstuffs and goods more expensive to import but also ramps up the price of fuel for British drivers. With oil sold in US dollars, the cost of petrol and diesel will remain high while the value of the pound remains down against the US dollar. It is already forcing more drivers off the roads as detailed at https://theguardian.com/ which will only harm the UK economy further by reducing the mobility of consumers.
The forex market is one of the most liquid markets for anyone to trade. The GBP/USD forex pair is also one of the major currency pairs in forex and with so much uncertainty surrounding the UK economy, it makes things very difficult for retail traders to assess when it’s a good time to go long (buy) on the pound against the dollar. As covered at https://skilling.com/, one of the five main CFD trading tips for retail traders is to utilise stop-loss orders to manage risk. It can prevent losses on a falling pound from being magnified and remove the emotion from managing open positions in the market.
Alternatively, https://skilling.com/ highlights one of the potential rewards of CFD trading is the ability to ‘short’ (sell) an asset. If you believe the pound’s price will continue to fall against the US dollar, it’s possible to short the GBP/USD pair and make a profit if the pound continues to weaken in the days and months ahead. The US Federal Reserve has been hawkish on its plans to increase interest rates again to curb inflation and the Bank of England will face a no-win situation of having to either follow suit and risk a recession or adopt a steadier interest rate rise and accept an even weaker pound.
Why is the US economy less affected by interest rate hikes?
The US Federal Reserve can afford to be somewhat more bullish on tackling inflation. The US economy appears to be posting more robust data than the British economy and the country itself is much less exposed to the war in Ukraine, with America able to generate and maintain its own energy supply unlike much of Europe that’s reliant on Russian gas. The Federal Reserve appears confident that the US economy can cope with further interest rate hikes to “restore price stability”.
The UK, on the other hand, appears somewhat more fragile. With the energy price cap recently lifted by Ofgem to an eye-watering £3,549 per year on average as reported by https://www.bbc.co.uk/, and interest rates making mortgage repayments more expensive, household incomes are being squeezed in all directions. Although the UK’s unemployment rate has been robust in 2022 so far, the coming winter could lead to some tough decisions being made by employers.
