Key indicators for the British pound (GBP) - statistics & facts
2022 has not been the best year for the British pound sterling, as it faced both increasing pressure from a strong U.S. dollar, as well as a combination of geopolitical uncertainty, forecasted economic downturn, and growing inflation. One British pound sterling (GBP) was valued at 1.16 U.S. dollars at the end of August 2022, against 1.38 U.S. dollars one year prior. This accelerated on Friday September 23, after the UK government announced plans to support the economy by lowering taxes and increasing its government debt. The unexpected aggressiveness of these measures led investors to abandon the pound. Consequently, the pound was worth roughly 1.07 U.S. dollars on Wednesday September 28 – a decline of nearly 10 percent within a single month. That same day, the Bank of England announced it would temporarily buy UK government bonds to stop the rising yield and, according to British media, to relieve UK pension funds from losing their investments in obligations. Which factors could help support the British pound, or could hamper its development from here on?
Announced plans are unique for the UK
The plans included tax cuts that were worth around 45 billion pounds, quoted by several media as the largest tax decrease in 50 years. The headline measure was to remove taxation for taxpayers within the highest income bracket while also lowering taxes on, for example, real estate and removing a bonus limit for bankers. Such so-called trickle-down economics, – lowering taxes to improve high income purchase power so that this “trickles down” to low incomes – are not new to the United Kingdom, as these were used during the 1980s. The intention is again to lower taxes for high incomes but, unlike the 1980s, also toincrease its share of government debt against GDP by loaning money. Deemed a speculative policy by many, the consequently decreasing pound could impact UK import values for several commodities and further increase inflation.
The euro is also in a difficult position
The pound declined in a time when the eurozone also faced challenges and financial markets were not open to risks. Many European countries predicted a low GDP growth as both energy and food commodity prices increased sharply after the start of the Russia-Ukraine war, leading to a decline of household purchase power. Other factors of uncertainty include the dependence on Russian gas in several countries in Europe – such as Germany – as well as the results of Italian elections in September 2022. Opposed to this is the relatively strong position of the U.S. dollar against either the euro or the British pound in 2022, regarded by many as a safe haven for investments. Several financial analysts, therefore, conclude that whenever the tension on the financial markets lifts, the British pound could eventually show a recovery.
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Raynor de Best
Content expert covering payments and (crypto)currencies