Pound Sterling and US Dollar at parity?

When I was in Bristol, UK for my first degree, the Pound to Ringgit went up to RM8 to 1 Sterling Pound! Yes, that was in September / October of 1997. Well, those times have passed. These few weeks has been pretty bad for the Pound because of Brexit referendum. The UK public has made a decision to leave European Union. Well, majority wins even if it’s just 51% of all the votes with more than enough number which did not vote. In case we think this is already the worst, there is now a potential that US$ and Pound may reach parity. Yes, One to One.

Reported in Reuters. This is just a prediction by El-Erian, the chief economic adviser to Allianz which has around 1.3 trillion euros ($1.4 trillion). Wait a minute, TRILLION. Okay, better take his views slightly more seriously. He said, Britain must quickly come up with a credible and swift Plan B to EU membership that included a free trade agreement with the bloc. UK needs a new Prime Minister who would be able to negotiate effectively with the EU. Without a good outcome from the negotiation, Britain will face greater structural uncertainty, lower economic growth and a higher risk of recession. A sobering thought indeed.

Current Prime Minister David Cameron has stated that he will step down and will not lead the negotiation for the exit. I think he has made a good choice. He did not want it in the first place. El-Erian added that “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.” I personally do not think EU leaders would want to make it impossible for any trade to happen between the EU and the UK. However, to provide too much flexibility and concession may also meant that some other members may contemplate doing the same. That fine balance is the real reason for current volatility of the currency. Happy following.

written on 8 July 2016

next suggested article:  BREXIT and UK property market – Wall Street Journal

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