Sterling falls below parity, adding new bearishness, falling to lowest level since 1985

　　Author: Hou Xintong

　　Against the backdrop of an economy on the brink of recession and high inflation, the new prime minister's "flowering" of Tesla on September 5 (Monday) failed to bring more certainty to the market, sending the pound to its lowest level since 1985.

　　Immediately after that, bad news such as the Bank of England's interest rate hike expectations cooled and the death of Queen Elizabeth of the United Kingdom came one after another.

The market expects that the pound is expected to remain under pressure, becoming another currency to fall below parity against the dollar after the euro.

　　On Thursday, the pound against the US dollar rose to 1.16 before the European Central Bank's decision to refresh the daily high. After the European Central Bank's decision, it quickly fell below 1.15, and when it refreshed the daily low, it was close to 1.1460, and finally closed down 0.29% at 1.1501.

In today's Asia-Pacific trading session, the pound against the dollar continued to hover around the 1.1500 level.

　　At 6:30 p.m. local time on the 8th, the British royal family issued a statement saying that Queen Elizabeth II of the United Kingdom died at Balmoral Castle in Scotland at the age of 96.

At a time when the British people are suffering from inflation and the European energy crisis continues to ferment, the Queen, who has always been a "reassurance", has passed away.

　　UK prices are now rising at their fastest pace in more than 40 years, with inflation hitting 10.1% in July, surpassing double digits for the first time since 1982.

UK household energy bills are set to soar to an all-time high as UK inflation soars.

According to statistics, the cost of maintaining a basic standard of living in the UK has increased by 20% as the country faces the worst family budget pressure in a generation.

　　In addition, falling market expectations for a 75 basis point rate hike from the Bank of England next week also weighed on the pound.

Interest rate futures pricing on Thursday showed financial markets pricing in the probability of a sharp 75 basis point rate hike from the Bank of England next week has fallen to below 50%, from above 80% earlier in the week.

　　Shahab Jalinoos, global head of foreign exchange strategy at Credit Suisse, said a higher interest rate environment is needed if the UK is to attract enough foreign investor capital to support the pound.

But the Bank of England's apparent reluctance to aggressively raise interest rates for now is a key factor against the pound.

　　“Hopes for substantive action at the Sept. 15 Monetary Policy Committee (MPC) meeting were dashed on Wednesday as MPC members said they had no intention of taking aggressive action. The BoE’s impact on the outlook for the pound is significant. "If the Bank of England is dovish for any reason (dovish leanings or fears of political attack), loose monetary policy combined with Truss' fiscal policy aimed at subsidizing consumers, UK inflation could rapidly deteriorate further," he said. Not only will this fail to attract foreign capital, it could even lead to an outflow of funds from the UK. In this darker scenario, the consequences for GBP would be disastrous.” He predicts GBP/USD will fall to 1.1250 next.

Meanwhile, the pound will also depreciate against the euro, which will also rise to 0.8700 against the pound, due to "the hawkishness of the ECB and the sluggish UK economy".

　　HSBC research has found that the impact of the Bank of England's policy expectations on the exchange rate of the pound has become more important than ever.

Dominic Bunning, strategist at HSBC, said: "This year, the pound has been heavily influenced by broader risk appetite. Equity volatility is usually the main driver of the pound, but right now, the impact of interest rate spreads has actually exceeded investment. That makes the BoE’s rate hike path even more important.” He added that the Bank of England’s policy and communication was a complete drag on the pound, and the Bank of England was too slow to challenge inflation by raising rates.

“The FX market is tired of waiting for the BoE to actually come out with more hawkish moves. The BoE has at best met market expectations for rate hikes, which have been higher than the Bank actually raised rates,” he said. That depresses the pound," he said.

　　In addition to the news-level impact, Watling said the deep imbalance in the UK will also cause the pound to fall further to parity against the dollar.

He analyzed that the U.S. economy seems destined to fall into recession in 2023.

The debate in the market right now is whether the recession will be mild or severe.

But whether mild or severe, recessions lead to a sharp tightening of liquidity.

And the Fed's quantitative tightening program -- the end of its massive asset purchases to support the economy and markets -- will exacerbate that.

The Fed's balance sheet reduction combined with interest rate hikes will dry up liquidity in global markets.

During boom times when liquidity is abundant, economies can operate with severe imbalances.

In a downturn, however, imbalances are the only thing that matters.

　　"Unfortunately for the UK economy, in terms of imbalances, the UK is the worst of the major Western economies," he said. "A good composite measure of imbalances is the current account balance, and the latest data shows that the UK is currently The deficit is equivalent to 8% of gross domestic product (GDP). This imbalance caused problems for the UK economy before the financial crisis, when it was 3.5% of GDP. Before the recession in the early 1990s, this imbalance The ratio is around 4.5% of GDP. To make matters worse, UK productivity growth (a measure of real wealth creation) has been virtually stagnant since 2010, meaning the UK economy has not generated much new sustainable income to pay the bills. "

　　In view of this, Watling expects that the rapid appreciation of the dollar against the pound will continue, and the pound may fall to parity or even lower levels against the dollar in the next 6-12 months.

He advised foreign exchange investors to hedge their risk by buying products that protect against the risk of losing money on UK government debt, namely 5-year and 10-year credit default swaps (CDS) instruments.