Sterling is being pounded even lower today in this week’s trading, as traders have started things exactly where they left off on Friday. Sterling looks like an emerging market currency, especially when you look at the price of the British Pound a few months ago and compare it to where it is now.
Bears are the only ones who are in control of the price, and bulls are simply nowhere to be seen. However, as we march towards the European session, it seems like things are a little worse compared to the Asian session, when the price of the GBP/USD moved towards the 1.03 price level.
This current price, which is off the lows of the current session, is still likely to change its direction. This is because the reality is that traders have likely lost their trust in lawmakers who are steering the government. In addition, the BOE has made mistake after mistake, which has further shattered the confidence in Sterling. The harsh reality is that the cost of living crisis is going to become even worse as the currency falls to this extent.
We believe that the GBP/USD pair could easily reach parity this week, even in the next day or two, given the current momentum that we are experiencing in the market.
In order to save the currency from a huge disaster, the Bank of England is now likely to increase the interest rate by a full percentage point, and it is highly possible that the Bank of England will do this in an unprecedented fashion. An unexpected announcement is highly anticipated from the Bank, and traders should remain cautious about this.
Shorting the Sterling is the most popular trade right now, and there is a strong possibility that if and when the Bank of England increases the rate, we may see an immensely strong rally for Sterling.
In all of this pessimism, there is one silver lining for traders and investors, and that is given the weakness of the British Pound, we may see foreigner investors buying property in the UK as the currency has depreciated that much. For many, this could be a once a lifetime opportunity, and it is likely that we may see several headlines popping up in the coming days from different estate agents, and that could really serve as a catalyst to change the current bearish path.
In terms of policies, the Chancellor said over the weekend that he is not done with his fiscal policies to save the UK from its misery as he still has other support to announce. From these comments, the tax cuts of £45 billion are only a start, and it sounds like there is clearly a lot more to come.
The main reason behind the current fall in Sterling is traders losing their confidence in the UK’s ability to pay its debt as the debt to GDP ratio continues to increase. Cutting taxes and increasing spending by borrowing more reduces the value of the currency in the short term, but the UK has little choice now to do anything else but this.
Staying in the forex lane, traders are also watching two more currency pairs very closely, and that is the EUR-Dollar and the Dollar-Yen. The ECB is pretty much expected to increase the interest rate by at least 75 basis points in the coming days as the Bank knows that inflation is a kind of disease that if not tackled properly, it is highly likely to hurt the Eurozone in a place where it will hurt them the most: a deep recession taking place. Christine Lagarde, the ECB President, will testify today to EU lawmakers and traders will monitor her speech very closely to spot any clues for the ECB’s future monetary policy.
If there is any risk which is bigger than anything right now, even more so than a sovereign crisis of a developing country, it is geopolitical tensions between the super powers. For instance, right now, all eyes are on President Putin’s upcoming speech on Friday, and it is widely anticipated that on Friday, he will be announcing the extension of the Russian border—the land taken from Ukraine.
In addition, banks like JP Morgan, Citi, and others have started to build risk scenarios that they would have never thought of in their wildest dreams, for example, taking into account the scenario of China attacking Taiwan, as the US is encouraging the Island’s independence in so many ways, and President Biden has vowed the support the country with the US army if there is a conflict. China would never like to have the presence of the US army near its boundaries, and traders believe that to eliminate this threat, it will likely do what Russia did with Ukraine. If such a scenario takes place, we would see economic sanctions like those imposed on Russia, applied to China, and that would really be the final nail in the coffin of hopes for recovery of the world’s economic growth.