Battered pound risks sliding further on Brexit trade war

The pound risks falling further in the second half of 2022 as a trade dispute with the European Union becomes more protracted.

That’s according to Bloomberg Intelligence’s Audrey Childe-Freeman, who said it’s possible for sterling to fall to $1.15 in the second half of 2022, although it’s likely to avoid a collapse to parity with the dollar.

Headwinds have already driven the pound to the lowest since the pandemic struck after a 12% drop in the past year. The currency steadied Friday around $1.2470, after sliding to $1.2156 a week ago.

“A trade war between the EU and UK is a scenario that could fuel further significant sterling downside,” wrote Childe-Freeman, BI’s chief G-10 currency strategist, adding that could lead to a test of the $1.20 level. 

Still, worries about “once unthinkable” sterling-dollar parity are probably misguided, Childe-Freeman said. That would require a bigger equity rout, disorderly dollar appreciation, or persistent UK stagflation. 

Sterling is still under pressure as the risk of recession in the UK may limit the amount the Bank of England can hike rates to deal with surging inflation. The BOE has adopted a gloomier tone than peers, warning of a prolonged period of stagnation as it grapples with plunging consumer confidence.

While central banks the world over are grappling with similar issues, the fact that the BOE is now leaning toward supporting growth rather than curbing inflation is resulting in a weaker currency, according to Kamakshya Trivedi, the co-head of global FX and interest rates at Goldman Sachs.

“That’s why we expect more weakness in the pound versus both the dollar and euro,” he said in an interview on Bloomberg TV earlier on Friday.

The UK government is planning to introduce legislation within weeks to override parts of the Brexit deal it negotiated with the European Union, a move that’s likely to escalate tensions with the bloc.