UK economy expecting a tough year – how will this impact the pound?

UK economy expecting a tough year – how will this impact the pound?

Pound sterling exchange rates experienced a tough end to the year 2022. Throughout last year the Bank of England raised interest rates in an attempt to cool-off rampant inflation. This saw interest rates rise from 0.25% to 3.5%. The interest rate hikes initially provided support for the pound, but the last few BoE meetings have been surrounded with negative commentary regarding the UK’s economic outlook.

The cost of borrowing in the UK has dramatically increased which has impacted the ability for businesses to loan money but also the cost of mortgage payments for millions of Brits. As mortgage payments increase, household disposable income decreases. Disposable income is also affected by inflation as the cost of goods and services increase. UK food prices rose to a record level, 13.3% in December.

Last month, GDP showed the UK economy shrank in the last quarter at a rate of -0.3%. This adds to the speculation that the UK is heading for a lengthy recession. Sterling exchange rates will come under pressure if the UK faces lengthy economic hardship. During the last recession, the pound fell to 1.05 against the euro and 1.14 against the dollar. Cable (GBPUSD) was trading in the 1.14s as recently as November 23.

Goldman Sachs forecast a 1.2% contraction in the UK economy for 2023, well below the predictions for other major economies. They predict a 1% expansion for the US and a 0.6% contraction for Germany. OECD data shows since 2019 the UK economy has underperformed against every other G-7 nation.

Readers can expect the pound to experience a tough year ahead based on current predictions and sterling’s value will come under significant pressure if the economies of its major counterparts continue to outperform the UK.

If you have a currency exchange involving the pound during 2023 it could be beneficial to speak with a specialist. At Lumon we have several tools that can help you minimise risk and capitalise on positive rate movements.

Please feel free to contact me directly on [email protected].