The fall of an empire's currency probably far from over
July 4 (Reuters) -The waning influence of Great Britain is starkly apparent in the pound's decades-long decline that is probably far from over.
The pound, which was trading around 2.65 versus the dollar in 1972, almost reached parity during the bond market rout in 2022. The rebound above 1.30 fell far short of the 1.45 peak that followed the UK's decision to leave the European Union, and compares with a rally above 2.0 in 1991 that followed a slump toward 1.05 in 1985.
The pound, which weakened significantly after the UK exited the European exchange rate mechanism in 1992, has been undermined by the subsequent split with the EU, after which UK stocks have significantly underperformed their neighbours.
The higher interest rate that has supported the ailing pound since the brief threat to parity is now expected to fall. When it does, the pound will likely follow it down, and a series of drops in pound's longer-term trading ranges will likely continue.
Where most trade unfolded within 1.20-1.40 between 2016 and 2022, nearly all trading has been below 1.30 since. A slide influenced by easier monetary policy will probably see the pound fall further, cementing the 1.30 area as the upside limit of a new range.
Should parity ever be threatened under normal circumstances, it may well give way with the exchange finally reflecting where the real power now lies.
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(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)
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