The lack of progress in the Brexit negotiations and the deteriorating economic situation are penalizing the British currency.

The euro rose above the level of 0.92 pounds and the English currency fell below 1.29 dollars.

Caught up by the lack of progress in the Brexit negotiations, the pound sterling fell again last week below the level of 1.30 dollars, at 1.2850 dollars. It has lost 4% against the greenback since the beginning of September. The country must manage a delicate divorce with Europe at the very moment when it is going through its worst recession since 1955. “The United Kingdom has experienced the largest fall in activity (-20.4% for its GDP) G10 countries in the second quarter. The Bank of England is expected to opt for the status quo at its September 17 meeting, but pressure is mounting for it to ease monetary policy. “Underlines the bank HSBC, which anticipates a plunge in the English currency to 1.20 dollars. Inflation is moving at an annual rate of 1% in the UK and against a target of 2%. To achieve its objective, the Bank of England will have to take new measures that will weaken its currency.

The pound fell as low as $1.15 during the greenback's surge in March at the height of the coronavirus global financial storm. "The country could raise taxes as early as this fall, which will hamper the economic recovery," said Shreyas Gopal, strategist at Deutsche Bank. The pound sterling has tended to rise in the wake of the stock markets. It is thus exposed to a general correction of equities”.

Volatility

The endless and sluggish Brexit negotiations, punctuated by twists and turns and gambles, have created uncertainties that have caused a strong stir on the English currency. Last year, Mark Carney, then still Governor of the Bank of England, shocked the City by comparing the pound to an emerging currency, given its erratic movements and high volatility.

This year, the euro reached its highest against the English currency, at 0.9320 pounds sterling on March 18 in the midst of a storm on world markets. It moved up to 0.9230 pounds after the European Central Bank meeting.

Linked destinies

The consensus forecast established by the Bloomberg agency forecasts 0.90 pounds for one euro at the end of the year. “This level seems to exert a mystical pull on the currency pair. Pushes above 0.90 have been fleeting in recent years. In the coming months, we estimate that the euro should evolve between 0.87 and 0.90 pounds sterling with an end-of-year target at 0.89”, estimate Thomas Flury and Dean Turner of UBS Global Wealth Management. The average rate of the euro against the English currency since the thunderclap of the June 2016 referendum is around 0.88 pounds. Its record was reached at the end of 2008 at 0.9570 pounds.

Much more optimistic than most strategists, Steve Englander, head of G10 currency strategy at Standard Chartered, anticipates a rise in the English currency to $1.40 by the end of the year. Historically, the pound-dollar pair tends to move in the same direction as the euro-dollar. When the euro gains 1% against the greenback, the pound gains between 0.5% and 0.7% against the dollar.

The European and English currencies have their destinies still partly linked. "If Brexit turns out badly for the United Kingdom, it will also be the case for Europe, but to a lesser extent," said Kit Juckes, head of foreign exchange strategy at Societe Generale.