Are you wondering if the British pound could reach parity with the US dollar? It’s been spoken about more often in the last few months as the sterling continues to decline, and the greenback conversely gathers strength with value not seen in more than 20 years. The pound and the dollar have never hit parity before, but a couple of times in the past they’ve gotten pretty close.
Back when Thatcher was in power in 1985, the GBP/USD fleetingly fell below 1.10, and it was a somewhat similar economic story as is happening today, with economic stimulus in the form of tax cuts in the U.S, inflation out of control in both countries, and oil prices spiking.
Let’s take a look at how the major currency pair might hit parity for the first time. If you’re a keen Forex trader looking to take advantage of the recent volatility, it’s important to find a trusted and regulated broker such as Easymarkets, and be sure your trades are made efficiently and safely – meaning following your trading plan and always using stop-losses.
The perfect recipe for parity
If the Purchasing Power Parity (PPP) theory is to be believed, then eventually all currencies should hit parity over time. To put things in perspective, we’re a long way from where the pair once sat during the 1800s, at 5:1.
Since that time, the pound has been gradually trending lower and some analystes believe that 2023 will be the year it finally levels with the USD. Closing at 1.1266 USD on the 21st of September and hovering around the same at the time of writing, predictions may not be far off, given the risks the UK is currently facing with its economy.
The pound’s decline against the dollar lately hasn’t been helped by the Federal Reserve front-loading interest rate hikes to try to bring out-of-control inflation back in line with target numbers. The Bank of England has been slower to raise its key rates for various reasons, and this in turn has led to a gap in the interest rate differential between the two countries.
When investors see an opportunity to increase their returns by turning to a country with higher interest rates, they will need to sell their local currency first, creating more demand for the preferred currency and less demand for the one being sold. This is one of the reasons why the USD is so strong against other major currencies at the moment.
Even now though, with the Bank of England slowly but steadily increasing its interest rates, including today, September 22nd, when the central bank raised rates by 50 basis points to 2.25%, the impact of unyielding inflation is growing by the day, a serious energy crisis has the British economy in trouble and handing out billions in energy subsidies, and they’re staring down the barrel of recession and possibly stagflation. All of this points to an even weaker pound relative to the dollar, and it’s anyone’s guess how low it will go.