British pound seen trading near parity with the dollar, economists say, as selloff takes Wall Street by surprise

It’s a notion once thought impossible. As the British pound trades at its weakest level against the dollar in more than two years on Friday, some economists expect it could close in on parity with the greenback by the middle of next year, if not sooner.

In a research note published this week, Capital Economics’ Chief U.K. Economist Paul Dales said he expects the British currency could trade as low as $1.05 by mid-2023 as Europe’s energy crisis continues to hamstring the British economy.

If proven correct, this would leave the British pound at its weakest level against the dollar since just before the Plaza Accord, a multinational agreement to allow the U.S. dollar to weaken, was signed in September 1985, according to Dales.

Dales’ forecast is rooted in the expectation that the U.K. and European Union will slide into a punishing recession while inflation remains stubbornly high, preventing the Bank of England from cutting interest rates to ease the pain on British businesses and consumers. Meanwhile, Dales expects the U.S. economy will slow, but escape a recession.

“Our forecast that the energy crisis will push the euro-zone and UK economies into recession while the US gets away with a milder slowdown suggests that the euro and the pound will weaken further against the US dollar,” Dales wrote.

While Dales’ view on the pound is particularly bearish, several megabanks with a strong presence in the U.K. are also anticipating a sharp deterioration. Swiss bank UBS, for example, is advising clients to hedge their pound exposure and refrain from “bottom-fishing” as it expects the pound could trade as low as $1.07 by the end of the fourth quarter.

 “The U.K. economy is struggling under the weight of soaring inflation, primarily driven by high gas prices. Against this backdrop, Bank of England rate hikes offer little support for the pound,” warned UBS’s Clémence Dumoncel and Dean Turner.

Already, the pace of the pound’s decline over the past month has taken some on Wall Street by surprise. In forecasts published earlier this summer, the currency strategy team at Standard Chartered Bank had expected the pound to fall to $1.18 in the coming months.

But as of Friday, the British currency
GBPUSD,
-0.29%

had already fallen to $1.15, down 0.3% on the day, and 15% so far this year, according to FactSet data.

This marks the lowest level for the pound since March 2020, when it briefly plunged to $1.14 during the global financial-market ructions caused by the onset of the COVID-19 pandemic.

Steven Englander, global head of G-10 currency strategy at Standard Chartered, said he expects the pound will likely continue to weaken in the coming months. However, he doesn’t see parity in the cards any time soon.

“We’re not big fans of the likely U.K. performance looking ahead. It’s in a neighborhood that’s slowing down badly, partly for inflation issues, and partly for structural issues,” Englander said.

“But you would have to have really good luck on the U.S. side, and really bad luck on the U.K. side, to see parity happening,” he added.

Of course, if it does happen, the pound wouldn’t be the first major European currency to reach parity with the dollar. The euro
EURUSD,
-0.01%

was trading at parity with the dollar on Friday after breaking below that level in July for the first time in 20 years.

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