Pound hits 31-year low against USD

Could the pound go any lower? Some say yes. Photo / 123rf

The pound has fallen to a 31-year low against the US dollar, pushed down by the latest market jitters surrounding Brexit.

Sterling had already fallen sharply following the referendum, leaving markets, businesses and Britons asking: what next?

Where is sterling headed next?

The average analyst thinks the fall in sterling is probably over. The market consensus is that the pound will stay at roughly $1.28 for the next six or nine months, before edging up to $1.30 in the second half of 2017 and creeping up over the next few years, ending up back at $1.55 in 2020.

That is far from certain, however. Bank of America Merrill Lynch's analysts believe that, for now, the pound could keep sinking as traders and investors realise that Brexit is actually going to happen, but remain uncertain on its final form.

"A number of observers felt Article 50 would be triggered after German elections in September 2017 while others thought the UK could avoid Brexit entirely," said economist Robert Wood.

"So PM May's announcement [that she will trigger Article 50 by the end of March] could trigger some change in market perception: Brexit is 'getting real'."

How low could it go?

The biggest downward forecast comes from HSBC, whose analysts believe sterling could keep on falling sharply to hit $1.10 by the end of 2017.

The bank's analysts believe that the UK's large current account deficit and budget deficit both need financing by foreign investors, who may currently be less keen on buying British assets.

As a result the currency needs to fall to make UK assets more attractive.

Some of this has already begun to happen - the Bank of England this week said foreign investors have cut the pace at which they invest in British shares, while transactions in commercial property this summer were down 60pc on the same period of 2015, in part as overseas buyers do not want to buy as much property.

Is that good or bad?

It depends which side of the equation you are on- it makes imports more expensive, but boosts exports by making UK goods cheaper abroad.

The effect may be smaller than exporters hope, however, as British manufacturers often import some of their parts and raw materials, so the fall in sterling also pushes up some of their costs.

Overall the effect should be to rebalance Britain's economy and reduce that balance of payments deficit.

HSBC believes that investment from the EU will dip and so Britain will need to attract investment from further afield, and to get there, sterling has to fall further.

"You start getting staycations which are very good for the current account deficit, foreign tourists are coming in, it helps exports... the UK has to attract money from countries outside of the eurozone. The currency has to fall more, the UK will become bargain city and you get an allocation of capital from people outside the eurozone," said HSBC's head of FX strategy David Bloom.

He argues that a prediction of a sharp fall in sterling is not a moral judgement on Brexit or the state of the UK, but rather a sensible way for an economy to rebalance - instead of having a recession or a tough financial squeeze on Britons, the currency moves instead, enabling the economy to rebalance.

"Sometimes we are negative on a currency and people think we're burning the flag," said Mr Bloom. "It is exactly the opposite - it is a flexible currency and in a time like this, it needs to flex. It will help rebalance the economy if we want to enter into this new brave world."