There has been plenty of talk about the pound against the dollar in the wake of the current economic climate due to Brexit and COVID-19. Despite the general gloom surrounding the state of the global economy, the pound seems to be performing better than expected and has received a “notable lift”.
Pound Sterling is rallying after the Bank of England’s Monetary Policy Committee voted unanimously to keep interest rates at 0.1%. The announcement, on 6th August, was described by economists as “the first pro-Sterling surprise” for the market.
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Forecast “better than predicted”
The downturn had not been as severe as the Bank of England predicted in May, when it released its last economic forecast. Annual GDP growth for 2020 was set at -9.5% in May, up from the previous forecast of -14%.
Now, the forecast for 2021 is +9%. This means the bank predicts the UK GDP will return to the levels of the fourth quarter of 2019 by the end of 2021. Not only is this a significantly more optimistic prediction than anticipated, it is also more positive than economists at several major financial institutions in the UK had considered.
In March this year, the surging dollar saw the pound fall to a 30-year low. Sterling had dropped to $1.145 in New York. It fell more than 12% against the dollar on 19th March, after more than a week of volatile trading. The latest predictions are therefore a massive boost to the economy, despite the effects of COVID-19.
Effects of Brexit
The effects of the no-deal Brexit, when Britain left the EU without a trade deal in place on 31st January 2020, had led to the pound plummeting. Then, when the COVID-19 virus saw the UK go into lockdown, Sterling losses deepened against the dollar.
The pound has been fluctuating against the dollar for the past 12 months. During the last quarter of 2019, the pound ended at $1.3342, compared with $1.3126 for the week ending 7th August 2020. This has been the pound’s best performance in months.
Apart from the announcement from the Bank of England’s Monetary Policy Committee about interest rates, news of a critical trade deal between the UK and Japan has further strengthened the pound. The government’s announcement, on 6th August, that the trade deal should be in place by the end of 2020 has led to renewed confidence.
According to government sources, the post-Brexit “comprehensive free trade deal” can be completed by the end of this year. Trade Minister Liz Trust believes it will provide a boost for Britain’s efforts to start securing more lucrative trade deals with other countries. She said, “further progress” had been made towards the deal with a “like-minded democracy” and the UK’s “long-standing ally”, after Japanese Foreign Minister Toshimitsu Motegi flew into London to finalise the free trade agreement.
What does the future hold?
While economists have noted that Pound Sterling is beginning to claw its way back quicker than anticipated, the UK isn’t out of the woods yet. Parts of England and Scotland, including Aberdeen, Blackburn and parts of Leicestershire, have just had local lockdowns put in place following a spike in cases of coronavirus. Implications on local businesses are not yet known.
Back in May, when the “Bounce Back Loans” scheme was launched by the government to help struggling businesses, there were 100,000 applications to British banks in the first day. The aid must be paid back, and a survey of banks has revealed fears that around 50% of borrowers may grapple with repayments if the situation doesn’t improve soon. People are relying on short-term loans to help them get through these challenging times – or at least until there is a light at the end of the tunnel.
Unfortunately, many analysts believe the current buoyancy of the pound in exchange rates is a “technical flow phenomenon”. They think we should still have concerns about its future. If the rate holds well into August, however, this may start to dispel some of the fear.