Economist predicts pound could fall to $1

8 July 2016

Sterling could reach parity with the US dollar before the year is out, according to one leading economist.

Since the shock result of the European Union referendum was announced on 24 June, when the UK voted to leave, the pound has sunk to a 31-year low relative to the dollar and reached as low as $1.2884 on Wednesday (6 July). As at 1430 on Thursday (7 July) stood at $1.3014.

And, with the impact of Brexit still unknown due to a swathe of political uncertainties including an ongoing battle for Number 10, Mohamed El-Erian, chief economic adviser to Europe's largest insurer Allianz, has predicted currency will depreciate further.


All-time low possible

He says, "it is not inconceivable for sterling to head to parity with the US dollar". In the event of this playing out it would mark an historic low for the pound. The lowest it has ever been is $1.05 in February 1985.

Speaking to Reuters, the former Pimco chief executive urged the UK to "get its political act together," and provide a swift and credible 'Plan B' that includes a free-trade agreement with the EU. He adds that "so far they have not stepped up to their economic governance responsibilities".

With question marks over whether the next government will trigger Article 50 and begin divorce proceedings with the EU, El-Erians sets out two different scenarios for the future of the pound revolving around access to free trade.

He continues: "The future value of sterling is a function of how and how quickly the structural uncertainty is resolved - if Plan B is delayed and/or it doesn't involve much of a free trade set-up with the EU, it is not inconceivable for sterling to head to parity with the US dollar.

"If, however, there is agreement between the UK and its European partners on a new arrangement that allows for sufficient free-trade access, sterling could end up appreciating from its current levels."

Other predictions are just as gloomy, with city forecasters predicting the pound will decline to $1.26 when the Bank of England moves to cut interest rates, potentially to zero.


George Magnus, former chief economist at UBS, predicted before the referendum the pound would fall by 20% in the event of a 'leave' vote. "That still looks likely," he writes in his blog before agreeing with El-Erian that "if the economy really shuddered, parity is quite possible".

However, Andrew Edwards, chief executive of ETX Capital, is not sure the pound will hit an all-time low, which parity would represent, and branded El-Erian's claims "a little far-fetched".

This story was originially written for our sister magazine, Money Observer.

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