Despite the comfort from greater political stability, could sterling still reach parity against the US dollar?

After the referendum, sterling fell to a 31 year low against the dollar (Source: Getty)

Lukman Otunuga, research analyst at FXTM, says Yes.

Sterling received a pummelling in June, with prices crashing to 31-year lows against the dollar following the shock Brexit victory. Financial markets were rattled, and it was obvious that the Brexit outcome was severely underpriced, with even the bookkeepers being completely on the wrong side of the trade.

An unmistakable feeling of anxiety has subsequently gripped the UK economy, with sterling feeling the burn. Even before this turmoil, the lacklustre economic data and warnings from Bank of England (BoE) governor Mark Carney on the dire consequences of a divorce from the EU eroded the value of the pound.

It seems likely that the Bank will cut interest rates and, when combined with lingering post-Brexit uncertainty, parity of the pound with the dollar could materialise.

It should also be kept in mind that expectations are growing over the Fed raising US rates in 2016. The potential divergence in monetary policy between the BoE and Fed could be the final ingredient needed for parity.

John Redwood, chief global strategist at Charles Stanley, says No.

I’m glad the government has given up the idea of a punishment budget; it shows that the Treasury forecast of what would happen after Brexit was too gloomy.

There is no reason for the pound to fall to parity with the dollar. The devaluation against the US currency in recent months has improved UK competitiveness substantially.

The dollar itself has been strong generally against main world currencies. This has reflected the relatively good performance of the US economy compared to the Euro area and Japan, and the suggestions from the Fed that rates might rise. Now the US authorities seem to be much more cautious over future rate rises, this pressure has abated somewhat.

I think too many forecasters have been far too negative about the UK economy’s prospects over the next couple of years. If the data does not live up to their negative billing, that is another reason why sterling should not sink so low as $1 to £1. There may be pleasant surprises ahead in 2017 for a UK economy which has done better than most since the banking crash.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

Related articles