Our forecast that the energy crisis will push the euro-zone and UK economies into recession while the US gets away with a milder slowdown suggests that the euro and the pound will weaken further against the US dollar. We think the pound will fall from $1.17 now to around $1.05 by the middle of next year. That would leave it below the levels reached before the 1985 Plaza Accord ($1.09), after the UK left the ERM in 1992 ($1.43), during the 2008/09 Global Financial Crisis ($1.38), after the 2016 Brexit vote ($1.21) and during the 2020 COVID-19 crisis ($1.21). In fact, $1.05 would be an all-time record low. At the same time, with high inflation likely to prevent the Bank of England from cutting interest rates as soon as the financial markets anticipate, we expect only a small fall in 10-year gilt yields by the end of this year and a big decline in the FTSE 100.
In view of the wider interest, we are also sending this UK Markets Outlookto clients of our UK Commercial Property Service.
Note: Will the UK’s next Prime Minister be able to turn around the country’s economic fortunes? Find out what our economists think in our special Drop-In on Monday, 5th September. Register here.
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