Apart from the effects of Brexit on the UK economy, several other factors have made the Sterling pound decline in value, including the lack of confidence in the pound by investors. Since 2016, there have been ongoing uncertainties over what Britain’s economy will look like post-Brexit. In this post, we will also discuss what needs to be done to increase the possibility of the pound regaining its value in 2023 and the future.
Brief History of the British Pound’s Sudden Fall in Value in 2022
Although the British pound was not doing really well since 2016, in 2022, the pound faced both political and economic turbulence that caused the currency’s value to drop to the ever lowest. 2022 was the worst year for the British pound. On 26th September 2022, after over 3 decades since the pound experienced a crash after the mini-budget was announced, the pound value hit an all-time low. The pound dropped to the lowest against the top currencies, such as the US dollar, the euro, and the Swiss franc.
| Year | Average Closing Price | Year Open | Year High | Year Low | Year Close | Annual% Change |
| 2023 | 1.22 | 1.21 | 1.24 | 1.19 | 1.23 | 1.57% |
| 2022 | 1.24 | 1.35 | 1.37 | 1.07 | 1.21 | -10.52% |
| 2021 | 1.38 | 1.37 | 1.42 | 1.32 | 1.35 | -1.23% |
| 2020 | 1.28 | 1.33 | 1.37 | 1.15 | 1.37 | 3.21% |
On Friday morning of September 23rd, the chief finance minister Kwasi Kwarteng read the mini-budget. One of the main intentions stipulated in the mini-budget included pumping more money into the already weak economy. The budget did not address the already high inflation rate. This worsened the economic situation and weakened the pound to a $1.03 record low.
The announcement caused significant uncertainty and market turbulence. The impact led to a sharp fall in the value of the pound as investors reacted to the potential economic collapse. The investors no longer had confidence in the value of the pound. Therefore, there was decreased demand for the currency.
Factors That Led to the Sharp Drop in the Currency’s Value
The pound has seen good times, which can’t be said about its position over the last couple of years. The value of the pound might decrease due to a number of economic issues. Factors such as Brexit and the lack of confidence among investors, unfavourable government policies, harsh economic conditions and uncertain market speculations are among them. Knowing these aspects might help better understand the current state of the British economy. The following are some of the main factors.
Another significant factor behind inflation and rising rates is climate change. Weather patterns have been increasingly unpredictable since 2020, with several high-impact weather events worldwide, especially in Europe. Power bills are spiking as heat waves have multiplied and cold snaps strain global gas reserves.
Mini Budget Chaos
In September, the UK government announced huge tax cuts, sending the pound to a record low. Liz Truss, the shortest-serving Uk’s prime minister, upon ascending into office, made a comprehensive economic policy that adversely affected the economy. The monetary policy was mainly about substantial tax cuts that led to a fall in the pound’s value.
Mainly, there was no formula on how to recoup the extra borrowing. Usually, in an economy, the investors can recoup their investment in the government through higher economic growth and performance and improved tax receipts. Since that’s not possible, the government will sink more into debt.
Investors Abandoned the British Pound and Bonds
When investors abandoned the British pound, the demand for the currency reduced. This further led to a decline in the value of the pound. Typically, the UK currency, like other currencies, is affected by demand and supply. When investors lost confidence in the British government’s ability to restore the economy, they sold their holdings and sought alternative high-value assets.
The uncertainty facing foreign investors in the UK will further aggravate the situation. Some investors may insist on being paid their investment returns in dollars which will hurt the businesses they have invested in. Also, since exporting goods from the UK will be cheap, many foreign investors may take advantage of that.
High Energy Prices
One of the goods imported into Britain is natural gas. Notably, the gas is priced in dollars which is stable and doing well. Also, most sectors are significantly affected by changes in gas prices and supply. Therefore, the high oil prices translate to a high cost of living.
Notably, since Russia invaded Ukraine, gas prices have risen leading to increased energy prices that have led to a high cost of living and an adverse economic crisis. In response, the UK government introduced an energy price guarantee where households will spend not more than 2,500 GBP per year on energy bills. The government will borrow to finance the energy crisis plan. The borrowing means a huge government debt which will adversely affect the UK’s general economic performance.
Other factors that led to the sharp drop in the pound’s value:
- Weak economic growth
- Global economic factors
- High government debt
- Inflation
Aspects That Might Accelerate the British Pound Value Recovery in 2023
Despite the fall in the value of the Sterling pound, much can be done to improve its value and restore its credibility in foreign markets. Mainly, the recovery of the pound’s value and the UK’s overall economic performance will depend on the Bank’s of England intervention and the decisions made by the government.
Some of the things that can cause a turnaround in the performance of the Sterling British pound in 2023:
- Assess the impact of changes in demand and inflation;
- Address the economic inactivity;
- Raise the interest rates;
- Manage the national debt.
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The Bottom Line
You now understand what’s going on with the pound, whom to blame, and what needs to be done to reinstate it to its average trading value. Many factors contribute to the currency’s instability, including economic, social, and political. Without a doubt, the pound has been through some turbulence in the past couple of years.
Can the British pound become one of the best-performing currencies in 2023? Yes, although 2022 was a bad year for it, some promising efforts and interventions by the government can boost the pound’s value and the entire economy.