GBP/USD Pierces Through Psychological 1.2000 Level
The GBP/USD is piercing through the psychological 1.2000 level as a recent three-month rebound is challenged. This week, traders will be watching the US monthly employment data and the Federal Reserve’s policy announcement.
Market Speculators Will Take Aim at Parity (One GBP to One USD)
The British pound is losing value against the dollar, in part due to a widening interest rate differential between the two currencies. Investors also fear a U.K. recession and prefer the USD as a safe haven.
A weak pound could exacerbate the risk of a global recession, which would be a negative for global growth. Besides, investors are betting that the Bank of England will have to raise interest rates quickly and aggressively to combat the decline in the pound.
Meanwhile, the USD is gaining ground against most other major currencies, due to higher relative interest rates and widening interest rate differentials. As a result, the pound is falling against the dollar in both nominal and real terms, with speculative sellers driving the price down.
Further Downside Ahead
The British pound, which has been stronger against the dollar for decades, is now nearing parity with the US currency and may soon be trading below it in real terms. While the UK’s economy has recovered from its shock Brexit vote, investors are not convinced of the government’s plans for tax cuts and borrowing that will require tens of billions of pounds in additional debt to stimulate the economy. The pound is also losing its status as a reserve currency, which means that the country’s foreign exchange reserves are shrinking. This is a problem because the Bank of England has to borrow more money to meet its spending commitments, which means the pound is losing value at an alarming rate.