The pound: how low can it go?

The pound found some support around its lowest levels since the 1970s on Monday, but the response of international investors to the UK’s redrawn finances remains brutal.

There is a clear question hanging over the current valuation of the pound remain in dealing rooms from London to New York and Singapore and it is one with a series of important implications for the whole of the UK: How low can the pound go?

Monday’s low took it to $1.035 during Asian trade, a fall of almost 5%. As the European money came in, sterling managed to pare the worst of those losses, but it stayed lower on the day overall, at $1.0815, a fall of 0.4% for the session and levels not touched since the 1970s and also fuelled by a wider trend for a stronger dollar.

Here is a round up of some the best answers from City experts to the question everyone in the world of currencies trading is asking.

ING is looking at parity with the dollar for the pound, wiping out any premium it has always had over the US currency.

“The trouble for sterling now is trying to identify what policy shifts are viable to support the pound – indeed should UK authorities decide that the pound needs supporting,” said Chris Turner, global head of markets at the Dutch bank.

“Given that fiscal concerns have been the core factor undermining the pound, an announcement that the BoE will suspend planned gilt sales in October may be welcomed by the gilt and then the FX market.  Alternatively, there is FX intervention, but the UK has only around $80 billion in net FX reserves – barely enough to cover two months’ worth of imports.”

Neil Wilson, chief market analyst at Markets.com, points out that “markets have a habit of overshooting on the way up and the way down”, but thinks sterling probably has “further to go”, in what he calls “parity gravity, adding:

“The central bank is in a tough place and any intervention might only be a sticking plaster as the path of least resistance for the pound is lower. Despite this, to not act would be wilful neglect. Just as the chancellor has taken a reckless approach to fiscal policy – a kind of economic vandalism – the BoE needs to take a very considered approach to monetary policy.”

Matthew Ryan, Head of Market Strategy at global financial services firm Ebury, said the pound’s bounce of its lows happened “rather quickly”, and pointed to “speculation that the Bank of England could intervene either by announcing an inter-meeting rate hike or by selling its foreign currency holdings.”

He added: We think that the latter is unlikely, although an emergency rate hike cannot be ruled out. In any case, markets now see the bank’s base rate rising to almost 6% in 2023 - a policy move at odds with the government’s attempts to support UK growth.”

Political turbulence for the pound looks set to be a major market theme for a while yet.