Pushing Higher on US Dollar Weakness
The British Pound Latest: GBPUSD Pushing Higher on US Dollar Weakness
Despite a significant rally since September, the pound is still down more than 15% against the US dollar this year. With UK inflation still elevated, the cost-of-living crisis taking hold, growth slowing and debt markets in turmoil, the outlook for the pound continues to deteriorate.
While there has been a temporary stabilization of the pound, it is unlikely to last long and analysts say that the currency may continue to underperform in 2022.
The pound has fallen to an all-time low against the US dollar and many experts believe it is time for the Bank of England to take some action to stem the decline. Several economists have voiced their opinion that the Bank of England should lift interest rates to attract more foreign investment into the economy.
Some of the main factors that could be triggering the decline in the British Pound include a sharp rise in energy costs, weak growth and government spending plans that are expected to spark inflation and increase public debt levels. However, the Bank of England has opted to take a more cautious approach.
In order to keep the pound from falling too far, the Bank of England must remain committed to its plan for a gradual rate hike. The central bank is expected to begin hiking its official interest rates in the second half of 2020 and it must not be tempted to raise them too rapidly, a policy that would be counterproductive for boosting growth.
Meanwhile, the central bank will need to continue tamping down inflation in order to avoid a recession. The central bank has a lot of tools at its disposal to do so, including bond buying and the expansion of its balance sheet.
But the Bank of England will need to be careful with its actions as it may end up causing more damage to the pound than good. This is especially true if the Bank of England decides to increase interest rates as a means to combat inflation, which will lead to a higher cost of borrowing for consumers.
The Bank of England has said it will monitor the effect of the government’s measures before it makes any decisions and that it will be ready to take emergency action should the situation turn worse. The Bank has also vowed to do all it can to protect the stability of pension funds, which have been hit by the record-low pound against the dollar.
Nevertheless, it is unlikely that the Bank of England will be able to stop the pound from declining as the economy faces some challenging headwinds. For instance, the current account deficit, which includes trade balances and net income from foreign investment, has widened to an all-time high this year.
Inflation has been rising in the UK, but it has not risen as quickly as expected. In fact, it has remained below the Bank of England’s target for the year, which is around 2%.