Covid-19 – not Brexit – likely to be the biggest blow to the pound
Coronavirus is likely to deliver the bloodiest nose to the pound, more so than Brexit and the financial crash of 2008-2009.
The pound dropped to its lowest level on record on Tuesday against the currencies of the UK’s major trading partners.
The Bank of England announced that the exchange rate, which is gauged against a basket of currencies corresponding to Britain’s trade flow, declined to 72.9. There was a slight increase on Wednesday to 74.4.
These are extraordinary times. Right now, the pound sterling is weaker than at any time during the Brexit process, the financial crash 12 years ago or 1992’s Black Wednesday when the government’s hand was forced to pull the pound from the European Exchange Rate Mechanism.
This is happening now due to three key reasons.
First, the COVID-19 pandemic has sparked a flight-to-safety. As is the norm during times of economic turbulence, the U.S. dollar attracts more buyers, which consequently drives down the price of the pound.
Second, investors want liquidity and U.S. Treasuries are the most liquid assets, which is the reason why dollars are constantly in demand.
Third, before the pandemic, a large number of investors had piled into sterling foreseeing more gains after a decisive outcome from the general election.
Indeed, the beleaguered pound sterling will make an impact in several ways.
The considerable fall in value of the pound will lead to a reduction in people’s purchasing power and a drop in Britain’s living standards. Weaker sterling results in imports becoming more expensive, with elevated prices passed on to consumers.
Some analysts say the decline in the pound is good for exports, but we cannot forget that around half of Britain’s exports depend on imported components. As sterling drops in value, these will become costlier.
In addition, of course, a low pound is not good news for British expats who receive their income or pensions in sterling.
Furthermore, Britain’s financial services sector – which makes up around 6% of GDP will suffer from another knock to sterling as it is built on overseas investment that relies on a strong pound.
Therefore, it will be the coronavirus pandemic, not Brexit or the financial crisis of 2008 that will be the biggest blow to the pound as we delve further into uncertainty.
As a result, we’ll see a rise in domestic and international investors in UK assets contemplating the global options available to them to create, grow and secure their wealth.