The British pound – this month’s worst-performing major currency – could “easily drop to $1.18” at the end of June, warned Nigel Green, CEO of financial advisory deVere, as the currency shed almost 4% against the U.S. dollar in May and 3% against the euro.
“The pound is this year’s third-weakest major currency – just behind the New Zealand dollar and Norwegian krone, which have done even worse,” said Green.
He added that the pound has been battered since the Brexit referendum in 2016 and the ensuing years of political uncertainty, losing around 20% of its value since the referendum.
“The Covid-19 crisis has been another hammer blow for sterling as it promoted a flight-to-safety and ramped-up the search for liquidity. This situation is a win for the U.S. dollar and, in turn, a loss for the pound.”
The deVere chief executive added that there are legitimate concerns that the pound has further to fall in the next few weeks.
“It could easily drop to $1.17-1.18 by the end of June due to renewed and heightened fears of a negative shock due to a no-deal Brexit combined with the far-reaching economic fallout of the pandemic.”
Negotiations between the UK and the EU on their post-Brexit future relationship stalled last Friday with the EU’s chief negotiator Michel Barnier saying the two sides risked reaching a “stalemate.”
British Prime Minister Boris Johnson has repeatedly threatened to walk away from the talks if insufficient progress is made by next month’s high-level negotiations. The UK has indicated the alternative of an “Australia-style” deal, a relationship where both sides trade on basic World Trade Organisation terms, similar to a no-deal Brexit.
“An even weaker pound will help to reduce people’s purchasing power and a drop in UK living standards. Weaker sterling means imports are more expensive, with rising costs being passed on to consumers,” said Green.
“The fall in the pound is good for exports some claim, but remember that 50% of UK exports rely on imported components. These will become more expensive as the pound falls in value. A low pound is, of course, bad news for British expats, amongst others, who receive income or pensions in sterling,” he added.
“The country’s financial services sector – which represents 6% of all economic activity – will also be adversely affected because it is built on foreign investment that puts its faith in sterling being strong.”
The deVere CEO concluded that the pound will remain volatile, and is likely to become weaker in the next month.
“As such, it can be expected that domestic and international investors in UK assets will be seeking the available international options available to them.”