FYI | Jul 15 2008
By Rudi Filapek-Vandyck
The British Pound has retreated nearly 7% from its 26-year peak of US$2.12 set this past November and the currency is expected to weaken further by many currency experts. Among them is Joe O’Leary, Senior FX Advisor at Sillicon Valley Bank. O’Leary predicts the GBP will be the worst performer among the so-called major currencies against the US dollar in the year ahead.
This prediction is based upon the expectation the UK economy will suffer the same fate as the US: a sharply slowing economy in combination with rising inflation. Once inflation stabilises, O’Leary states, the Bank of England will start cutting interest rates and this will set the scene for more GBP weakness.
Supporting the above thesis is the fact the outlook for British gross domestic product (GDP) growth over the next year is forecasted to be the worst since the early 1990s, leading O’Leary to make the assessment that “the risk of outright recession is high”.
Consumer inflation in the UK is expected to remain above its current 3% through the rest of the year with O’Leary pointing out some experts in the market are forecasting inflation may exceed 4% by year end. Official interest rates are currently at 5%, the highest level in the Group of Seven industrialized nations. O’Leary suggests this has to date somewhat supported the British Pound. However, once the Bank of England starts cutting, the fall for the British currency could be quite severe he suggests.
O’Leary points at the median forecast by a poll of Bloomberg which sees the GBP at US$1.91 in six months and US$1.81 by the end of 2009. He would not be surprised himself to see the GBP fall another 6% by early next year to US$1.85.
