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While inflation worries remain persistent in the UK, recent data on business activity turned out to be better than preliminary estimates.
That the British Pound (GBP) is immune to massive falls is a once-held myth that seems not to hold true any longer. The harsh economic situation on the global scene is notably trickling down and affecting the rate of growth of the currency when compared with its two closest benchmarks, the United States Dollar and the Euro.
While generally an unthinkable proposition a few months back, the possibility of the British Pound falling below 1.05 against the US Dollar is now pegged at a 1 in 35 chance of happening before the end of September per data from the options market. Should the low level be hit, we can say that the extra privileges being enjoyed by the GBP that has made it more resilient against its international counterparts are all out of the window.
Of key note is the current economic outlook in the UK post-Brexit. At this time, the economic data from the UK shows the economy is bleeding, just as much as in the US where inflation is bursting through the roof. This generally gives neither the British Pound nor the US Dollar any competitive advantage over each other.
While inflation worries remain persistent in the UK, recent data on business activity turned out to be better than preliminary estimates. While the services PMI rose to 54.3 from 53.4, the composite PMI advanced to 53.7 from 53.1. While analysts expected both indicators to stay unchanged for the foreseeable future, the ripple effect of economic decisions from the European Union may generally impact what is obtainable moving forward.
Factors Fueling Massive Decline in the British Pound
What worries economists the most about the UK is its growing current account deficit. This figure came in at 4.2% of gross domestic product (GDP) in the first quarter, one of the worst of advanced economies. Amongst the underlying causes is the fact that the UK now depends on foreigners to finance its ever-growing funding gap with the rest of the world. The Pounds sterling is bound to experience new lows should there be a sudden stop in capital inflows from abroad.
The UK’s current account also includes net interests and profits received on the country’s investments abroad. While the UK experienced a period of boom in its net interests throughout the 90s and the 2000s, the narrative is now changing across the board. A few decades ago, the UK receives more income from its foreign investments than what it paid to foreigners working on its shores.
However, today, the opposite is the case, a trend that shows countries no longer accord the UK the exalted privilege it once enjoyed. While there is a great deal of correlation between the economic data in the US and the UK, we can expect the ongoing war between Russia and Ukraine to continually take its toll on the overall performance of both economies, with their currencies more at risk of decline.