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GBP/USD: storm in a teacup

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In 2022, ‘pound’ is even more of a bad word than ‘soccer’ in Great Britain. British currency showed the worst result in history in relation to the US dollar – at the end of September, it dropped to $1.03. After that, the currency recovered slightly, but still it doesn’t look great. Is the UK economy actually in such a catastrophic situation? Or is the mighty greenback simply too mighty?

GBP has lost about 11% to USD in 2022. Moreover, when the UK government released a plan to scrap income tax for top earners, this number was closer to 17%. It happened because the market expected a rapid rise in inflation and growth of the UK national debt. Shortly afterwards, the government reconsidered this decision.

That being said, there are a few factors supporting the pound against the U.S. dollar in recent months. Multiple interest rate hikes by the Bank of England and the aforementioned rollback of possible tax cuts to name a few. Such events don’t always have a major influence in the long run, but can often help traders in the short term. So, it’s important to follow events listed on the Economic Calendar to stay on top of things.

In general, the situation in the UK is similar to other European countries. The energy crisis, which began with the military conflict between Russia and Ukraine, is a large part of the problem. The crisis has led to inflation-driven increases, supply disruptions, soaring unemployment, etc. As a result, the British government has had to spend resources on supporting people and fighting against inflation as opposed to bolstering economic development and growth. Given the circumstances, it’s genuinely interesting where the GBP/USD pair will be next.

It’s worth noting that the pound is not the only loser at this ‘permacrisis’ party. Major currencies’ rates have decreased in 2022. The euro, the Japanese Yen, the Swiss Franc – very few are having a good time right now.

 

At the same time, this chart is not only about crisis. It’s also about the strength of the greenback. USD is the most popular and widely used currency in the world. In tough and unpredictable times, purchasing dollars is almost always a reliable bet. Increasing demand leads to an increasing currency rate.

Another factor is the Federal Reserve System, which can hike interest rates when necessary. Added to that, the USA exports energy carriers when European countries import them. As a result, high prices for oil and gas can be profitable for the US.

So, is it possible for this dollar-led pattern to be broken anytime soon? It seems that only positive prospects for European markets could do so. We don’t have a crystal ball, but that seems pretty unlikely for the foreseeable future.

There are, however, three opportunities for the British pound to return to success. Economic growth in Europe must begin to accelerate, the Fed must decrease the key rate (but not all at once!), and the energy crisis must wind down. Any of these factors would help GBP recover. Without them however, the pound will probably continue on its downward trend.


Interesting Related Article: “How to prepare your organisation for that inevitable crisis“

Source: Market Business News