How low can it go? With the pound sliding further this week, the question on many lips is where our currency will settle in this uncharted post-referendum landscape.
A brief dip below $1.28 raised eyebrows during trading yesterday; and while sterling picked up later on to trade slightly above $1.29 late last night, many City analysts are predicting a drop to below $1.20 in the coming months.
You have to go back over three decades to find the last time that the value of a pound was weaker compared to the value of a dollar. In 1985 the pound neared parity with the greenback, following a period during which the dollar had soared. The pound’s relative weakness was not a sign of a struggling UK economy, however. Margaret Thatcher’s divisive and controversial economic reforms had begun to bear fruit, and GDP was expanding healthily. Soon a wave of deregulation would unleash the so-called “Big Bang” in the Square Mile, a revolution in British financial services that has shaped the City that we know today. It is a reminder that weakness against a rival currency is not always so bad.
However, it is also difficult to gain too much solace given the UK’s current predicament and sterling’s simultaneous decline. Any prospect of a boost to exports is tempered by the relatively price-insensitive nature of many of our goods and services. Furthermore, many economists fear that the current account deficit, rather than narrowing, could widen if inward flows of capital dry up. And while these clouds weigh on the confidence of investors, entrepreneurs and consumers alike, Westminster resembles a playground without any teachers.
The Tory party, which delivered the referendum, seems so preoccupied with its tactical leadership battle to have barely noticed the economic strife that could be occurring on its watch. Former chancellor Nigel Lawson, now Lord Lawson, said this week that leaving the EU would complete “the job which Thatcher started”. Look beyond parliament, however, and it is hard to see the positive signs that were emerging under her premiership the last time sterling printed similar levels against the dollar. If the Conservatives want to emulate Thatcher’s legacy they need to elect a new leader ASAP and somehow formulate a clear and convincing plan to instil confidence back into the markets.