- After peaking on 1 September, the sterling-dollar rate is dwindling
- Experts predict that the momentum might not be sustainable given the slow economic recovery in the UK and rising rates of Covid-19 infections
- Slow foreign capital inflows also undervaluing the pound
The pound sterling is expected to fall against the US dollar due to the weak state of the British economy, according to experts. On 1 September 2020, the pound sterling’s value against the US dollar peaked at 1.345.
Daily spot exchange rates for US dollar against sterling
(Source: Bank of England)
For much of the year 2020 (except for the months March and August), the pound to dollar exchange rate has hovered below a value of 1.3. On 23 March 2020, when a lockdown was imposed across Britain, the pound crashed to its lowest yearly value of 1.1492.
Sterling – Dollar Exchange Rate Chart
(Source: Bank of England)
Experts warn that the health of the British economy, and more so, its slower than anticipated recovery could weaken the sterling and the 52-week high peak attained on 1 September might not be sustainable in the times to come.
In fact, the sterling has continued to remain weak after Britain left the EU. That was also an unpredictable time for the country’s political scenario. The uncertainty surrounding the growth of the UK economy existed much before the coronavirus pandemic hit the nation. Since the British economy was struggling to grow fast even before the pandemic struck it, the investors left the currency as soon as a lockdown was announced in the UK as they wanted to rush to the safer US dollar. This is despite the fact that the sterling is still considered a major global currency but the dollar is perceived to be stronger by the financial experts.
A recent Reuters poll found out that the recent gains made by the Sterling against the US dollar might not be sustainable in the short-term, due to the uncertainty prevailing around a Brexit deal with the European Union. The poll results also revealed that the fear factor due to the ongoing coronavirus pandemic is expected to delay the economic recovery process in Britain. The Reuters poll was conducted by interviewing more than 60 foreign exchange experts.
Coronavirus cases in Britain
The death rate in the UK has been one of the highest among the European nations, as a result of the widespread number of coronavirus infections. The total number of corona-related deaths has crossed 41,500 across the nation. On 4 September 2020, there were 1940 new coronavirus infections reported collectively across the regions of England, Scotland, Northern Ireland, and Wales.
The total number of people who have been tested positive due to the coronavirus infections in the country till the same date are 342, 351. During the beginning of July 2020, the daily Covid-19 reported cases had troughed and had reached below 500. But since then, they are steadily moving up, which is a cause for concern. The warnings by health experts regarding a second wave in the coming winter months are making the government and people even more cautious.
These gloomy statistics surely brings out the reason for people being fearful of coming out of their homes and resuming life as before.
The British economy is also substantially dependent on foreign capital inflows. During the coronavirus pandemic period, the FDI inflows have dwindled, putting pressure on the sterling pound to put up a balancing act by contracting.
Essentially, if the macro-economic fundamentals of a country are strong, they reflect in terms of a strong currency and vice versa.
State of the UK economy
Michael Saunders, member, monetary policy committee, Bank of England said that more job losses could be expected around many sectors, as the UK government withdraws the furlough scheme by the end of October 2020. Last few months saw a relatively quick recovery as it was supported by lower rates of coronavirus infections and a strong fiscal support from the government, which cannot be forthcoming in the long-term. The percentage of workers put under the furlough scheme has dropped from 30 per cent in May 2020 to 11 per cent in the month of August 2020.
The fact that the speed of recovery has slowed down is also visible from the recently released Markit/CIPS PMI index for the British construction sector. The sector’s output sums up to about 6 per cent of the country’s GDP (gross domestic product). The PMI index for August 2020 was lower than that of the previous month of July 2020, which denotes a falling recovery momentum.
Also Read: British Economy To Rebound In Q3
While the negotiation talks are going on between Britain and the EU to finalise the finer details of the sought-after free trade agreement from both the sides, there are certain areas of discord that are taking a longer time than anticipated to get resolved.
The main areas of disagreement from both the sides are a level playing field to eliminate chances of unfair advantages from either party, fishing rights over the British waters, and the means of dispute resolution in case of any difference of opinion.
In fact, it is not just the dollar, the pound has started to weaken against many other global currencies like the euro for instance. Euro has in fact grown strong against the US dollar by about 10 per cent from May 2020 to early September 2020.
So, while the sterling has come under pressure due to uncertainties surrounding the Brexit, eradication of the coronavirus pandemic, and falling FDI inflows into the UK, experts point out that the undervaluation of the GBP is nothing new, it has in fact only been accentuated due to the Covid-19 crisis led scenario. Some experts are of the opinion that the British pound began to get undervalued long back in the year 2014 even before the Brexit referendum was officially announced in 2016. The slow recovery process of the UK economy is further delaying the rise of the pound, point out the financial experts.