Since the beginning of the year, the British pound has lost almost 12% against the US dollar, but the currency is expected to recover almost half of the ground it has lost in 2022 in the coming 12 months. This is because the Bank of England (BoE) appears to be set to increase interest rates further, which will offer support to the struggling currency.
BoE’s hawkish stance
Even though the Bank of England (BoE) was the first bank to have raised borrowing costs last year in December, it has been overtaken by an overly hawkish US Federal Reserve in order to control the soaring inflation numbers.
The interest rate has been increased by the BoE five times since December and last month, it was asserted that the bank would act ‘forcefully’ if there is a rise in inflationary pressures. But, the difference between the BoE and the Fed is that the latter opted to increase the interest rate by 75 basis points, while the former has increased the rate by 25 basis points each time.
It is not just this hawkish pace of the US Fed that has taken a toll on the Sterling and given support to the dollar. The currency has also been hurt because of the row between Britain and the European Union over the Northern Ireland protocol, which appears to be escalating. The country’s trading ties with the EU will be affected unless there is a solution.
Moreover, the British economy is also exhibiting signs of a slowdown already and the currency woes have further been aggravated by the political turmoil in the country. Ministers resigned from their positions, putting the tenure of Prime Minister Boris Johnson under threat, as they stated that he is not fit to be the premier.
The possibility of recovery
Despite such problems, recent polls have shown that forex experts believe the pound will be able to recover against the US dollar by almost 7% and would hit a value of $1.27 in a year’s time. On Wednesday, the currency had been trading at an all-time low of $1.19. According to market analysts, this would be a rocky period for the pound until it starts going up.
They said that a turn was also likely because things would also change for the greenback. However, there is a long way to go through then and sterling has to go through a lot of challenges to get there. As for the expected lowest point for the British pound in the next six months, it is expected to come down to $1.18. On Tuesday, the currency had reached $1.1897.
Market strategists said that the political issues in the country have downside risks for the sterling and the economic troubles will be a headwind. But, they added that the positioning levels and stretched values indicate that the downside position would be very limited.
Sterling did better against the euro this year, as it lost only 2% against the single currency. In addition, it is expected to hold steady against the currency in the coming months as well.