The Pound Went on a Wild Ride Close to Dollar Parity in 2022
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The Pound Went on a Wild Ride Close to Dollar Parity in 2022
(Bloomberg) -- Three prime ministers, four finance ministers and one ill-fated budget dragged the pound within an inch of parity versus the US dollar in 2022.
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It was a wild ride for the currency, which suffered as political chaos engulfed the UK throughout the year. But everything went into overdrive in September, when the government’s gamble on a huge tax giveaway backfired, investors dumped sterling and UK bonds, and the Bank of England was forced to intervene to prevent a gilt market crash.
As the turmoil unfolded, sterling was being compared to an emerging-market currency and the UK’s long standing credibility on international markets was coming undone. Now, even with the worst past, it looks poised to remain weak as the country embarks on a much-needed repair job on its economy and finances.
Strategists and portfolio managers expect it to stay between $1.10 and $1.30 for some time. The options market shows there’s a 40% chance the currency will be hemmed between those levels over the next two years, marking its weakest-ever trading range.
“Ever since the Brexit vote we’ve always called sterling a bit of a ‘basket-case’ currency, in that it follows growth much more closely than rate differentials,” said Eva Sun-Wai, fund manager at M&G Investment Management, whose Global Macro Bond Fund has been short the currency for most of the year. “And if we are coming into a very steep contraction and our growth is worse than other regions, that will hurt.”
The pound, which opened the year at $1.35, dropped to a record-low $1.035 on Sept. 26, just days after the disastrous mini-budget. Ultimately, the reverberations through the currency and gilt markets forced the government into a u-turn and led to the demise of Liz Truss as prime minister.
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