The Great British pound has seen its worst performance run against the US dollar in a decade, as many factors came together to cause it to drop 11 days in a row against the US currency.
A “perfect storm” of difficult trading conditions is set to undo all the good progress that the pound made at the start of the year, when the UK bounced back from its immediate post-Brexit slump to find some stability and taper the rise in inflation.
Recent months have seen the UK’s financial performance derailed by the imminent threat of a no-deal Brexit as the deadline comes increasingly closer. With an October 2018 deadline set ahead of the 29 March 2019 official withdrawal of the UK from the European Union, markets have continued to experience jitters.
The pound is trading below $1.27 for the first time in 14 months, derailing any improvement that the currency gained after its initial selloff when Britain voted to leave the EU.
Wednesday’s mid-morning trading period saw the pound slump to $1.2669, marking a stark 11 days of consecutive losses against the dollar. ING Currency Strategist Viraj Patel labeled the situation facing the UK as a “confluence of factors” causing the pound to drop 6% overall against the dollar this year.
As well as the looming Brexit deadline, Patel outlined two other significant reasons for the pound’s current struggle. One is that August is a difficult month for trading with the pound. As Parliament is in recess, there are no strong governmental moves planned to counteract any drops in currency.
Geopolitical crises are also emanating around the world, as trade wars ramp up between the US and China on ostensibly a weekly basis and Turkey’s significant financial instability attracts much news and attention around the world. Many currencies have suffered, although the dollar is not struggling quite so much in comparison.
One reason for this, according to some analysts, is because the dollar is a much safer currency. Those taking cash out of emerging markets need it to go somewhere reliable in a very volatile forex market. Naturally, the strength of the dollar at present and the weakening pound are contributing to cash moving in this direction.
With trade disputes between the EU and the UK being at the center of many worries concerning a no-deal Brexit and UK Trade Secretary Liam Fox predicting the likelihood of a no-deal Brexit at 60%, the markets appear to be reacting accordingly.
UK Foreign Secretary Jeremy Hunt confirmed on Thursday that the pound would see a severe slide in case no deal occurs by October. Commerzbank Currency Strategist Thu Lan Nguyen suggested that the drop would be as severe as the market drop when the UK voted to leave the EU.
Until any clarity comes forth on the potential of a deal, the markets are unlikely to rally in the favor of the pound. Patel confirmed that most European markets appear to be struggling against the dollar, with “broad emerging market turmoil” having a serious knock-on effect.
According to Patel, the fall in the pound is unlikely to stop anytime soon, as “the momentum in pound weakness is too hard to fight”.