After the euro, the pound is most likely to fall to parity with the dollar. (Photo/Dazhi/Archyde.com)
When the US dollar entered the cycle of raising interest rates, the euro zone, which has widened the interest rate gap with the US, was affected by the Russian-Ukrainian war and the energy crisis. Obviously, a new wave of Great Recession and European debt crisis is brewing. And which developed country currency will be the next victim of the dollar chess game? The answer may be sterling.
Due to concerns in the foreign exchange market, once Russia completely bans the supply of natural gas necessary for household heating and heating, lighting and factories to operate, the European economy may collapse completely. It fell further to $0.9998, hitting a 20-year low since the early days of the euro’s creation on July 15, 2002, sending a shock to the global foreign exchange market.
Compared with the euro struggling under the economic recession and energy crisis, the future of the pound seems more like a “bottomless pit”. Currently, the options market infers that the probability of GBP/USD falling below 1 by the end of the year is 1 to 40. If true, this would rewrite the 37-year record since 1985, when the pound hit a low of 1.05 against the dollar. However, the data of this implied probability is still basically zero in early June. What is wrong with the British economy recently?
The crisis in the pound was caused by a number of factors, including a sell-off in sterling assets due to the widening of the real interest rate differential between the United States and the United Kingdom following a rise in the dollar’s interest rate, the serious concern about the financial instability of the United Kingdom’s current account deficit, Johnson and The Conservative Party’s political crisis, post-Brexit job shortages and the energy crisis have led to high inflation in the UK, putting it at risk of a “stagnant inflation” crisis.
Since the June consumer price index (CPI) released by the United States on the 13th reached an annual growth rate of 9.1%, which continued to hit a 40-year high, the market expects that the US Federal Reserve may raise interest rates by another 4 yards (1.0%) at the end of the month. Suppressing stubbornly high inflation caused investors to worry about the further widening of the interest rate gap between the United Kingdom and the United States, causing the pound to depreciate by more than 1% against the dollar during the session on the 14th, falling below $1.18.