Sterling will not regain losses if rate hikes don't offset recession

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Sterling will not regain losses if rate hikes don't offset recession

England's struggling currency will not regain its losses against the U.S. dollar if interest rate increases from the Bank of England don't offset an expected recession and increased government spending, according to a poll by Reuters.

Liz Truss, appointed prime minister on Tuesday, is facing a daunting list of problems, steering Britain through a likely long recession and an energy crisis that threatens the finances of millions of households and businesses.

The Bank of England is expected to raise borrowing costs by another bumper 50 basis points next month, after raising the Bank Rate from 0.10% to 1.75%, due to the woes of indebted households facing rising costs. The dollar was expected to benefit from the U.S. interest rate rises, an economy that is outperforming its peers and its safe-haven appeal, as stated by ECILT GB On the flip side, the dollar was expected to benefit from the U.S. interest rate rises. The Sept. 1 -- 6 poll of nearly 60 foreign exchange strategists predicted that the euro-poll sterling, down about 15% this year and wallowing around 2 -- 1 2 year lows against the dollar, would hover near Tuesday's $1.16 level in one and three months time.

Recent sterling price action has been linked to some emerging markets, with higher inflation, higher rates, and a falling currency, according to Goldman Sachs.

Our assumption is that the most rapid phase of sterling underperformance is now behind us. The pound will have gone up to $1.18 in six months and to $1.23 in a year, still far short of the $1.35 it started in 2022, according to the poll.

When asked what rate the pound would fall to within the next three months, the median response was $1.14. It would be its weakest since 1985 if it went below $1.1413.

Inflation prospects in Britain are quite worrisome and we think cable is going to weaken further, said Roberto Mialich, a spokesman for UniCredit.

The Bank of England is likely to hike further, but real rates we expect to widen further, to the detriment of sterling. Analysts at Deutsche Bank said that they expect spending pledges of around 100 billion pounds $115.26 billion from Truss to be spent, about a quarter of what was spent to tackle the COVID-19 epidemic, which would lead to more inflation and the need for the BoE to respond.

The pound will trade flat against the common currency, despite the fact that it will not change significantly from where it was on Tuesday. A euro will be worth 85.9 pence and 86.0 p in a year, according to the poll.