Should You Buy or Sell The British Pound Sterling Now?

The Sterling has been trading lower for several months against the dollar, and today it has touched a level that we have not seen in nearly 37 years years. The question for traders and investors is if they should take this opportunity and buy the Sterling when it is sitting at its lowest level since 1985, or if they should sell the Sterling even more. 

Why Is Sterling Selling off 

Earlier today, the pound dropped against the dollar to $1.1137, the first time the GBP/USD has fallen below the price of $1.14 in almost four decades. There is no doubt that some of this has to do with the strength in the dollar index, but there are some particular significant concerns about the UK and its economy, which are behind the current move. 

The ongoing cost of living crisis has pushed consumers into a corner. Higher energy prices and soaring inflation numbers have impacted their disposable income. Wage growth has failed to increase in line with inflation. Today's retail sales data has confirmed once again that consumers are struggling to cope with soaring prices and higher energy costs.

Second, the UK has some self-inflicted injuries, such as Brexit, and despite the fact that it took several years for the UK to negotiate a deal with the EU, the issues around Northern Ireland are still as thorny as they were before. Although the UK agreed to a deal on Northern Ireland with the EU before, now there is ever-increasing chatter of the UK walking away from its commitment on Northern Ireland's deals. This threatens the whole agreement and opens another potential trade war with the EU. 

Third, the UK has changed its political stance toward China, and there are ever-increasing tensions between the two countries. More recently, an official delegation from China has been blocked from attending Queen Elizabeth II's lying in state. China is not a country that the UK wants to pick another war with as China is the second biggest economy in the world. 

The UK is already paying a heavy cost of getting involved in Russia and Ukraine's conflict. By putting sanctions on Russia, energy prices have more than doubled, and despite the fact that lawmakers have brought a cap of 80% in terms of energy prices and limited the average household's energy bill to £2,500 per year, this is still substantially much higher than Brits were paying before. The ongoing energy crisis in the UK is having a massive influence on the cost of living crisis in the UK and on inflation.

In a textbook trade, when a central bank increases an interest rate, the currency usually rises. However, in the Sterling's case, that is not what we have seen. The Bank of England has increased interest rates several times this year, and it is expected that the interest rate will rise all the way to 4% in the UK by 2023. Higher interest rates are cutting economic growth in the UK, and that is another adverse factor for Sterling. 

The future for the UK's economy looks very shaky, and the Bank of England is consistently failing so far in bringing inflation lower. The bank has very limited options but to continue to increase the interest rate at a massive economic cost and hope that inflation will come back to its normal level. Currently, it is near a 40-year high and running more than four times higher than the Bank of England's target. 

In my opinion, until and unless the UK sorts out its energy crisis, which is again driven by foreign policy, and adopts a more friendly political approach with China, the chances of the Sterling making a U-turn are limited.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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