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Pound sterling beats Argentine peso to become 2016's worst performing currency

Some analysts are convinced the pound still has further to fall

Hazel Sheffield

Friday 08 July 2016 16:06 BST

(Bloomberg)

The pound has beaten the Argentine peso to become 2016's worst performing currency after it plunged to a 31-year low in the aftermath of the decision to leave the EU.

Sterling dipped below $1.30 for the first time since 1985 in the second week after the European referendum.

It had rebounded slightly to trade at $1.29 against the dollar by the end of the week.

That brutal tumble means the pound has overtaken the Argentine peso as the biggest loser against the dollar among 31 other major currencies in 2016.

Some analysts are convinced the pound still has further to fall, with some predicting lows of $1.20 against the dollar in the next three months.

Goldman Sachs has said the pound could go as low as $1.20 against the dollar in the next three months, levels not seen since the summer of 1985.

Goldman Sachs analysts said that Bank of England warnings were behind the slide below $1.30 on Tuesday and that further central bank announcements about interest rates and could see the pound weaken further.

Brexit protest: Thousands march against Leave vote in London

Credit Suisse has also revised its three-month forecast from $1.58 to $1.22.

“We believe the UK economy's well-documented fiscal and current account deficits, combined with the fact that GBP is not especially cheap, leave room for still more GBP weakness,” said Shahab Jalinoos, global head of FX strategy at Credit Suisse.

The Bank of England's admission that Brexit had already affected the financial stability of the UK weighed on the pound on Tuesday.

Mark Carney, governor of the Bank of England, said markets were performing "pretty well" since June 23. He announced looser lending measures to encourage people to continuing making investments, prompting to pound to fall.

He said that the two-day fall in sterling was the sharpest in half a century, but that the lower value of the pound was “necessary” for other adjustments in the economy.

6 ways Britain leaving the EU will affect you

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1/66 ways Britain leaving the EU will affect you

6 ways Britain leaving the EU will affect you

More expensive foreign holidays

The first practical effect of a vote to Leave is that the pound will be worth less abroad, meaning foreign holidays will cost us more

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6 ways Britain leaving the EU will affect you

No immediate change in immigration status

The Prime Minister will have to address other immediate concerns. He is likely to reassure nationals of other EU countries living in the UK that their status is unchanged. That is what the Leave campaign has said, so, even after the Brexit negotiations are complete, those who are already in the UK would be allowed to stay

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6 ways Britain leaving the EU will affect you

Higher inflation

A lower pound means that imports would become more expensive. This is likely to mean the return of inflation – a phenomenon with which many of us are unfamiliar because prices have been stable for so long, rising at no more than about 2 per cent a year. The effect may probably not be particularly noticeable in the first few months. At first price rises would be confined to imported goods – food and clothes being the most obvious – but inflation has a tendency to spread and to gain its own momentum

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6 ways Britain leaving the EU will affect you

Interest rates might rise

The trouble with inflation is that the Bank of England has a legal obligation to keep it as close to 2 per cent a year as possible. If a fall in the pound threatens to push prices up faster than this, the Bank will raise interest rates. This acts against inflation in three ways. First, it makes the pound more attractive, because deposits in pounds will earn higher interest. Second, it reduces demand by putting up the cost of borrowing, and especially by taking larger mortgage payments out of the economy. Third, it makes it more expensive for businesses to borrow to expand output

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6 ways Britain leaving the EU will affect you

Did somebody say recession?

Mr Carney, the Treasury and a range of international economists have warned about this. Many Leave voters appear not to have believed them, or to think that they are exaggerating small, long-term effects. But there is no doubt that the Leave vote is a negative shock to the economy. This is because it changes expectations about the economy’s future performance. Even though Britain is not actually be leaving the EU for at least two years, companies and investors will start to move money out of Britain, or to scale back plans for expansion, because they are less confident about what would happen after 2018

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6 ways Britain leaving the EU will affect you

And we wouldn’t even get our money back

All this will be happening while the Prime Minister, whoever he or she is, is negotiating the terms of our future access to the EU single market. In the meantime, our trade with the EU would be unaffected, except that companies elsewhere in the EU may be less interested in buying from us or selling to us, expecting tariff barriers to go up in two years’ time. Whoever the Chancellor is, he or she may feel the need to bring in a new Budget

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“The adjustment in sterling has been significant and was sharp initially. That adjustment has moved in the direction that is necessary to facilitate some of the economic adjustments that are needed in the economy,” he said.

The Bank of England's Monetary Policy Committee may cut interest rates below their historic low of 0.5 per cent next week, though polls show economists expect a rate move in August.

“Clearly Mark Carney and George Osborne believe there are very rough times ahead for the UK economy as they begin rolling out a number of measures to cushion the potential impact," said Andy Scott of currency firm HiFX.

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