The bad news keeps rolling in for Britain. If it’s not Brexit or neighbouring European wars, it’s a migrant crisis on its doorstep. However, it’s unfair to blame Brexit solely for its weakening currency, as that might detract from the positive steps the US has taken to strengthen theirs.
Brexit was a blow to the pound and UK businesses. Still, besides dropping from 0.70 to 0.80 against the dollar in 2016 upon the referendum results, the movements since have mostly been non-Brexit related. On the 26th of September, the pound was at its weakest since the 1980s.
It took only 1.07 dollars to buy a pound, but only for a short while, as Kwasi Kwarteng’s mini-budget was short-lived. That will remind the government not to fund higher-bracket tax cuts amid high inflation and a cost of living crisis. Even if trickle-down economics worked, this was not the time or place, according to economists and the general public.
The pound recovered to around 1.22 USD since both Kwarteng and Truss have been replaced. Rishi Sunak, who will be aware of how much of a role the crashing of the pound played in pressuring a change in government, has well and truly been keeping his head down in recent weeks.
The impact of a cost of living crisis
During a cost of living crisis, it’s clear to see why currency becomes all the more important – particularly when looking at UK businesses. When raw materials and supply are rising in costs anyway, along with more obstacles over European trade due to Brexit, a depreciating pound only makes those energy and material supplies more expensive.
Whilst UK businesses may benefit from being more competitive regarding exports, the higher supply costs passed onto higher prices seems to nullify this benefit. In addition, and to the UK’s detriment, energy costs among competitors like the US and much of Europe have increased significantly less.
Analyst’s view: Pound sterling to dollar forecast 2023
According to HSBC, it’s not all doom and gloom for the pound. Everything that has weakened the pound-to-dollar rates could be undone in 2023. Paul Mackel, Global Head of FX Research at HSBC, noted, “The USD has performed very well over the last 18 months, but a number of the forces that propelled it towards its highest valuation in decades are seen losing ground.”
Some of these factors that Mackel is referring to are US interest rates, which have been rising faster than other developed economies like the UK. But, this cannot go on forever. The widening gap between US and UK rates will not only slow but could stop or even reduce in 2023.
Over at MoneyTransferComparison, chief writer Russell Gous says, “it is certainly possible that the US dollar will continue to strengthen due to Hawkish Fed and dwindling stock markets, while at the same time the UK will fall into a long recession, as per expectations from BoE – the two things combined are very likely to result in a parity or close to it”.
Furthermore, there is a cyclical nature to the US dollar too. In fact, it even has a name: the dollar smile theory. As Sean Coakley, marketing strategist at Cambridge Global Payments, says, “The theory goes that the U.S. dollar finds its favour in a cyclical fashion. When we see sell-offs in risk assets like the S&P 500, we see a jump in the U.S. dollar relative to CAD. But the US dollar tends to underperform at the very point in an economic cycle where the economy is set to recover.”
Another point of view is that changes in the GBP/USD have been happening for a long time now. David Hindley at the Financial Times points out that the pound sterling to dollar exchange rate has been weakening for around 70 years. Of course, significant events were the cause of most of these shocks, which shifted to a new equilibrium. But, both can be true, that there’s a cyclical nature within a longer trend – a bit like boom and bust cycles in stock markets that grow over decades.
Of course, the strength of the UK and US economies, in general, plays a role, too. Investors are less likely to buy – and therefore create demand – for a pound in a struggling UK business environment. KPMG estimates that the UK economy will shrink by 1.3% in 2023, followed by a partial recovery in 2024. Economists, however, only place a 70% likelihood of a recession in the US in 2023, with the Bloomberg monthly survey showing a 0.3% average GDP growth. Again, with US business recovering faster than UK business, it suggests that investment, confidence, and strength in currency bodes well for the US.
Implications for UK business
2022 is a year that most UK businesses will be glad to see the back of. However, despite a slight cooling on inflation, 2023 could be worse…
2022 saw only a minor contraction in the UK economy, much less than is expected in 2023. Furthermore, the recent December raise in base rate will increase the cost of debt as the new year unfolds. High debt repayments, a steeper recession, and lingering inflation create a very rough business environment. Generally, it also creates a lack of consumer confidence, too.
With a British public low on confidence, UK businesses may actually see a silver lining to a weak pound. Given that the UK’s recovery is slower than every G20 economy besides Russia, international customers may be relied upon for sales. The weak pound is conducive to UK competitiveness when selling, and efforts are being made to attract more outside investors too.
Adapting strategy in a post-Brexit Britain with a weakened pound is what will be important heading into 2023. As Stephen Welton, executive chairman at BGF, points out, “You need all the advantages and you need to play your hand well. We’ve handicapped ourselves in recent years with continuing uncertainty and we have to recognise that.”
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