GBP/USD Parity in 2009? Yes, it sounds quite wild. While parity between the pound and the dollar never happened, the global crisis is so deep, that this is an option.
GBP/USD in history
The last time that GBP/USD has seen such levels was back in 1985. In September 1985, while there were riots in Brixton, the pound emerged from deeper lows, crossed the 1.35 mark and stayed well above it in the next couple of decades.
GBP/USD parity was almost reached in that year. In Januray 1985, GBP/USD was as low as 1.0520.
And back to 2009, GBP/USD is now trading at 1.3576, after hitting a 23 year low, at 1.3505. The last break happened after the preliminary GDP was released in Britain: it showed a deeper than expected contraction -1.5%.
British Pound is going down in 2009
This supports the prediction by the “Centre for Economics and Business Research (CEBR) that the UK economy could shrink by as much as 2.9 per cent next year as bank lending continues to stagnate” – says the Daily Mail in the UK. A contraction of 3% is devastating. (Originally written here).
Recession in the UK is really bad. The real estate bubble burst sending house prices down. All the HPI (House Price Index) releases showed a big fall, always worse than the market’s not so high expectations.
The financial sector, which was one of Britain growth engines, was badly hit by the global crisis and the credit crunch. Capital has vanished in the UK, or fled elsewhere. Hedge funds are at the center of rise and fall of the financial sector.
In addition, the BoE hasn’t helped the pound. Mervyn King cut rates quite aggressively, with interest rates now at an all time low of 1.5%. In related statements, the Bank of England has signalled that a low pound will help the economy recover. Interest rates in Britain will probably go even lower.
So, all this leads to a weakening of the pound.
Dollar Up on Obama Optimism
The US dollar has gained strength in the past few days, even though economic data, such as Unemployment Claims. Barack Obama’s inauguration this week has spurred optimism in the US.
There are doubts regading his stimulous plans: some say they are too bold, and others say they aren’t sufficient. But economic strength and economic growth is not only in the numbers and the details.
Economy and psychology go well together. Obama’s promise of change, and making moves from day one, inspire many Americans, and back wind the greenback.
Of course, there’s a good chance that Obama won’t live up to all the expectations, but the spirit is mighty good.
To conclude, GBP/USD parity is still far, but this scenario can be real. In order to see 1:1 across the Atlantic, the pound has to drop another 35%, which is a lot. But, after seeing it drop so fast from above $2 to 1.35, and with a wild forex market, it can happen.