FinanceBoE Alerted About A Long-term Recession: Will Sterling Face The Repercussions?

BoE Alerted About A Long-term Recession: Will Sterling Face The Repercussions?

The Sterling sharply declined against the US Dollar earlier this month, as the Bank of England suggested an impending recession that may last up to mid-2024.

Immediately after the news, the British Pound swirled down to trade at the $1.11 level, exhibiting its worst performance since September 22 – and the largest drop among all major currencies. Since then, the Pound has significantly recovered and is currently trading at the $1.18 zone, after US CPI figures failed to meet estimates and a better-than-expected UK GDP. 

Bank Of England Forecasts A Long-term UK Recession

The Bank of England has warned that the UK is undergoing its longest recession ever, as it raised interest rates by 75 bps to 3%, which is the largest rate increase in 33 years.

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The central bank indicated that the country would encounter a “very challenging” two-year recession, with unemployment almost doubling by 2025.

The bleak prediction is most likely to weigh heavily on the Pound, which is already facing one of the worst years since 2008.

With the GBP in its current status, with geopolitical tensions being as they are, and with interest rates reaching so high, a recession seems unavoidable.

The BoE is not to blame here, though, since the “easy finger on the trigger” when it comes to the interest rate is a global phenomenon. However, the UK’s delicate political, monetary and economical situation may lead it to be hit hard by the global recession.

This means that decision makers need to carefully think about how the country is going to handle specific issues that are related to recessions, with unemployment being a key one.

Naturally, when consumerism shrinks, businesses are left with no choice but to lay employees off. Right now, in that sense, the British Isles are in a better position than many other countries in the OECD, with national unemployment standing at 3.6% as of September 2022.

However, this is already a slight (and concerning) rise from the 3.5% of August (which was, oddly, a 50 year low for the national economy). In that sense, BoE governor Andrew Bailey does have some room to breathe.

Sterling’s Struggle Over The Past Few Months

The Sterling has been tumbling for over a year amid BoE’s scuffle to tame inflation. It slumped to a record all-time low of $1.0382 in late September, after the UK government revealed its unwelcomed “mini-budget.”

This infamous tax-cut plan, coupled with the market turbulence, instilled fears among investors about enhanced government borrowing and eventually a decline in the Sterling’s strength. 

Later, the GBP recovered to almost $1.16 as the unrest subsided upon the exit of Prime Minister Liz Truss. But then again at this month’s start, the Pound dropped to near $1.11 levels after the BoE slammed an eight consecutive rate hike and warned about the longest-ever recession, when investors were expecting a less hawkish stance from the central bank.

Overall, the Sterling has been on a roller-coaster ride for the past several months, whereby many players have turned towards currency trading to capitalize on both market directions.

Easymarkets is one such platform allowing users to trade major forex pairs, including GBP/USD, under reliable conditions. 

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More Pain Is In Store For The Pound Amidst The Looming Recession

Many analysts are hinting that there’s more pain in store for the Pound over the coming months.

While both US and UK central banks have raised interest rates by a similar 75 bps earlier this month, US FED Chair Jerome Powell’s approach suggests a stream of more aggressive hikes than his UK counterpart Bailey’s, who believes that the tightening is overdone as the country plunges into a two-year recession.

Naturally, the BoE’s receding stance does not bode well for the Pound Sterling. 

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“Growth that cannot withstand many further rate hikes, as is implied by the BoE, in circumstances of more sustained rate hikes elsewhere is an increasing risk,” stated Derek Halpenny, head of research for global markets EMEA at the Mitsubishi UFJ Financial Group.

“Coupled with the UK’s large current-account deficit, it could mean investors view further Pound depreciation as the inevitable consequence.”

UK’s Latest Economic Data Came Out Better Than Expected But The Respite Appears Temporary

According to the official data released Friday, 11 Nov, Britain’s economy contracted by a less severe than-expected 0.2% in the third quarter, which is most likely the start of a lengthy recession. Previously, the analysts had expected a downtick of 0.5%.

In response to the news, Sterling edged higher by almost 0.2% to $1.1730, after hitting its highest point since Aug 26.

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