Why is the pound sterling falling again?

A new prime minister has been elected, taxes have been cut, rates have been raised, and the pound sterling is still losing ground.

As a result of the trading session on November 4, 2022, the GBP/USD pair returned below the level of 1.12. What didn’t the currency traders like this time? Strengthening of the dollar and the words of the regulator about a protracted recession.

According to the forecasts of the Bank of England, in the second half of 2022, the country’s GDP will decrease by about 0.75%. At the same time, the recession in the economy will last until mid-2024. EY analysts are slightly more optimistic – the situation will normalize in the second half of next year.

Who will be right, only time will tell. In the meantime, the Central Bank of the country will have to find a balance between the fight against inflation and economic growth. Excessively tight monetary policy may eventually hit the labor market, and there is not far from stagflation.

Will we witness a repeat of the crisis of the 1970s? According to the head of the Bank of England Andrew Bailey, this scenario is unlikely. Financial markets seem to be of the same opinion, with UK 10-year yields still below 3.5% and the FTSE 100 (^FTSE) index approaching 7,200.

What’s next? During yesterday’s speech, Mr. Bailey hinted at a slowdown in the rate hike in the future. A less aggressive policy may weaken the pound, but keep the economy from falling even deeper. As for inflationary pressure, there is all hope for a resolution of the energy crisis.