What’s Next For The Pound? (2023)

It’s been a torrid few days for sterling.

Earlier this week, the pound plunged to an all-time low against the US dollar, sinking to $1.035 in the wake of the government’s mini budget, which unveiled a raft of unfunded tax cuts designed to give a boost to the UK economy.

However, to say that financial markets baulked at what they heard from Kwasi Kwarteng, Chancellor of the Exchequer, would be a masterclass in understatement.

Earlier this week, the Bank of England (BoE) acted to shore up the UK’s government bond (gilt) market to the tune of £65 billion. This was done to prevent what it described as a “material risk to stability” which it said would lead to “an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.”

We’ve asked financial experts for their thoughts about what’s next for the pound and how events will affect consumers and investors alike.

Any views expressed are personal to the individual and do not represent advice on the part of Forbes Advisor.

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown

The outlook for the pound is still extremely volatile and sterling is unlikely to recover while the government’s unfunded tax plans are still on the table.

Consumers will continue to face severe cost-of-living headwinds due to the higher price of imports brought about by the weak pound. These worries will be compounded by fears about rising housing costs, due to mortgage rates shooting up which will affect not only homeowners, but also tenants as landlords are likely to pass on the rises for their repayments.

This comes at a time when many were already grappling with higher energy bills, so purse-tightening will continue.

Investor confidence in the UK has been damaged by a pile-on of worries about the direction of travel being taken by the new Liz-Truss led administration. Investors were already expecting that a recovery in the UK’s prospects would be dented by interest rate hikes – and that was even before fresh turmoil was unleashed by the mini-budget.

Housing, domestically-focused banks and consumer discretionary stocks are likely to be among the worst hit on the London stock exchange.

Charles White-Thomson, ceo, Saxo UK

Predicting the trajectory of sterling in this fast-changing environment is not for the faint-hearted, but I believe the pound will be weak against the dollar for some time.

I include foreign exchange, or currencies, in my approach to risk management. The first question to ask yourself is which currency makes up the majority of your expenses. Once you know this, ensure the bulk of your reserves are in this currency. This largely rules out currency risk with your biggest expenses.

The remainder of your currency holdings by definition are either investments, speculation or preparation for a particular event such as a holiday.

Risk management extends to your investments. Calculate roughly what percentage is in which currency. Once you have done this, decide whether this is what you want and if not, change it. Always be proactive.

Many UK investors will have made a significant return on their US dollar-denominated investments recently by investing in Apple, for example. It’s OK if this was more by chance than judgment but I would encourage more judgment than chance.

Tom Hopkins, portfolio manager, BRI Wealth Management

We believe the pound may be in for a slow recovery. The economy is fragile, borrowing is high, and the BoE must reassess interest rates.

If the pound remains weak, this will exacerbate the cost-of-living crisis.

Foreign investors could use a weak pound as an opportunity, allowing them to buy up assets that would otherwise cost more. Similarly, UK investors will see the valuations of their assets remain at depressed levels, which could force them to sell if more attractive buying opportunities arise elsewhere.

A weak sterling exerts a drag on UK small and mid-cap companies, not least because of the additional cost pressure on margins that larger corporations tend to be able to absorb more easily.

In addition, smaller businesses tend to be more domestically focused and therefore are less exposed to and diversified across overseas markets.

Victoria Scholar, head of investment, interactive investor

The pound was already on the decline even before the mini budget, but the Chancellor’s economic plan has accelerated losses for the UK’s currency.

Prices have already risen sharply this year with inflation close to double digits. Consumers have seen price rises across the board from food to petrol to energy bills. Sterling’s weakness could add to that upward pricing pressure.

For investors, the slide in sterling and the disorder in bond markets has spread to the equity market, with uncertainty weighing on the FTSE 100, the UK’s stock index of leading companies.

Buying investments in foreign currency such as in US dollars or euros has become more expensive for investors.

The slump in the pound has benefited UK exporting stocks like Diageo and Coca-Cola by making their offerings more competitive. However, housebuilder stocks have struggled.

Chris Beauchamp, chief market analyst, IG Group

It’s unlikely that we have seen the low in sterling, and that means more inflation, while at the same time we can expect further interest rate rises.

It seems the double-bind that consumers have been in for months is only set to get worse.

Meanwhile, the pound’s fall and the associated turmoil at the heart of government has meant UK investors have seen their holdings diminish in value. Admittedly UK exporting firms will get some boost from a weaker pound, but the accompanying rise in inflation will hurt margins.

Ultimately the lack of clarity on what comes next will hurt both investors and consumers.

Victor Trokoudes, co-founder and ceo, Plum

Despite a major intervention by the BoE to purchase gilts, the pound remains vulnerable. As the UK imports more goods than it exports, it’s hit harder by currency weakness than other European countries.

That’s bad news for consumers. Prices are likely to rise as the chances of the pound strengthening will be low if the government remains committed to its agenda and the disconnect between fiscal and monetary policy endures.

Holidaymakers will find their money goes less far abroad, as the pound has weakened against most major currencies.

The BoE’s moves so far this year to raise interest rates haven’t arrested the general decline in the pound. A big interest rate move in November, when the Bank is next due to make an announcement, may not have the desired impact if the fundamentals of the deficit continue to worry investors.

As for investors, they will likely be looking for companies who profit from exports, which might be good news for global FTSE 100 companies such as Diageo and Coca-Cola.

It’s a less promising outlook, however, for broader, more domestic-focused FTSE 250 stocks.

Kasim Zafar, chief investment strategist, EQ Investors

Given the current position with both the Prime Minister and Chancellor sticking to their plan, sterling weakness is set to continue.

UK inflation will remain high, if not head higher, not because of additional consumer spending, but from rising prices of foreign goods translated into sterling. Companies can’t afford to absorb this much sterling weakness in their margins – they will have to raise their selling prices.

The most obvious course of action for the BoE, therefore, will be to significantly raise interest rates. The potential for a deep and severe recession in the UK has grown substantially.

There is a possible path to recovery. If the BoE raises interest rates aggressively, if lower taxes boost growth and attract investment, if the cost of energy subsidies turns out to be lower than expected, and if US inflation is brought under control (allowing the US Federal Reserve to ease off tightening monetary policy), then sterling may well find strength.

With each of these looking improbable in the short term, the best chance for sterling strength in the short term probably comes from a Conservative party revolt that could force a change in government policy.

Frédérique Carrier, head of investment strategy, RBC Wealth Management British Isles

We have held a negative view on the pound throughout 2022 and continue to remain cautious.

The pound is vulnerable given the country’s yawning fiscal and current account deficits, while the US dollar’s relentless strength has been a constant pressure on the pound/dollar currency pair. We are sceptical that the BoE’s policy intervention in isolation can support a material recovery in the currency.

We downgraded UK equities to ‘underweight’ in September, as we were concerned the government’s policies were not commensurate with the challenges facing the economy.

We maintain our strong preference for internationally orientated companies and remain cautious on UK domestics.

Matthew Yeates, deputy chief investment officer, 7IM

The depreciation of the pound will likely be a negative for consumers, as it increases prices for goods purchased from abroad, adding further fuel to the inflation fire.

For globally diversified investors, the pound’s depreciation is not all bad, as investors can benefit from a higher price (in sterling) for their foreign assets.

This has helped cushion some losses this year, in a world where relatively few financial assets have been appreciating in price.

Shaun McDade, portfolio manager, Ravenscroft

The outlook for consumers remains bleak as the price of imported goods – and overseas holidays – will remain expensive.

On a more positive note, last week’s mini-budget has eased some of the pain caused by pressures in the wholesale energy market, as well as delivering some small tax cuts. We can also expect to see inflation rates moderate from here.

Investors in UK plc are insulated to some extent by the high proportion of earnings derived from overseas. Given that an already cheap market has become even cheaper from a foreign investors’ perspective, it’s likely we’ll see UK companies become the target of increased M&A activity.

Alastair George, chief investment strategist, Edison Group

Where a depreciating pound will really hurt is in the repricing of interest rates if the BoE raises rates more quickly, as markets now expect.

Many consumers have suffered sharply rising energy and food costs and now mortgage and credit card rates will be moving higher, risking a meaningful slowdown in the housing market and further eroding consumer confidence.

Investors will need to balance risk against opportunity. On the risk ledger, the political situation is highly uncertain, with a lack of support for the government growth plan and its unfunded tax cuts. The incoming Prime Minister’s first act seems to have been to rock the boat rather than steady the ship.

We do not think the pound will stage a meaningful recovery until investors are convinced that the apparent conflict between fiscal and monetary policy has been resolved.

In the meantime, investors should focus on UK equities which have been unfairly caught up in the market volatility, many of which are high quality companies operating either with significant, or the majority, of their operations overseas. We cannot exclude the possibility of opportunistic takeovers by foreign buyers.

Domestically focused UK companies are in the crosshairs of a likely significant economic slowdown in the UK following the sharp increase in interest rates now forecast, and we would be on alert for earnings downgrades.

Fiona Cincotta, senior financial markets analyst, City Index

The pound/dollar currency pair is now holding steady as investors continue digesting the latest developments in the post-mini-budget saga. The pound has recovered from its record low and is finding some support from the BoE riding to the rescue.

The recent action by the central bank has calmed a jittery market, but doesn’t address the underlying cause of the problem. Instead, it raises more questions over incoherent policy, which leaves the pound looking vulnerable.

As far as the consumer is concerned the outlook is bleak, with aggressive rate hikes on the cards which are set to push interest rates and mortgage repayments higher, with disposable income is set to fall significantly. This feels like a ticking time bomb with retailers bracing for a hard hit and house prices expected to collapse quickly.

Dan Ashmore, analyst, Invezz

The UK current account deficit, which is a log of exports minus imports, was already at record levels before the latest plunge in the pound.

The energy crisis – the UK is reliant on energy imports – had already been putting the balance of payments under pressure. This latest blow will do nothing to quell the sell-off in the pound.

The fallout from the pound’s plunge against the dollar is likely to hit the UK stock market. While exports to the US will be cheaper for US consumers and hence benefit UK stocks, the flipside is also true regarding imports being more expensive for British companies.

It is really the reaction of the BoE that will trigger the stock market one way or another. Some analysts believe interest rates will now be hiked more aggressively than previously expected to protect the pound.

Should this transpire, it would suck liquidity out of the market, further raise discount rates used to value the future cashflows of companies, and ultimately negatively impact the stock market.

No matter which way you look, we live in a ‘dollarised’ world. As the music stops on the historic 10-year financial market bull run, the only currency you want to hold is the dollar.

I’m not changing my position now, even as pound/dollar parity nears. Europe is in a worse place economically than the US, and the winter ahead will be very tough for all of us on this side of the pond.

Graham Bentley, cio, Avellemy

Given the BoE will not lose its focus on reducing inflation, sterling is unlikely to get any stronger without a dollar ‘collapse’, or a politically embarrassing government U-turn, potentially damaging both the prime minister and chancellor irrevocably.

The pound has fallen 25% against the very strong dollar this year, and short of a major political upheaval, expect the pound to keep testing its all-time low. Although the pound has been significantly less weak versus the euro and the Japanese yen, without more positive news imported goods will become increasingly expensive, adding upward pressure on inflation.

Overseas holidays for 2023 are already having their prices revised upwards for consumers, but investors in funds buying foreign shares will have seen their returns significantly enhanced as dollars, euros, etc will buy more pounds.