The pound could end the year as strong as £0.83 against the euro in a “best-case scenario”, according to a panel of experts.
This would be 5.5 per cent stronger than the rate it was at today (£0.88) before a new Northern Ireland Brexit deal was announced by Rishi Sunak and Ursula von der Leyen.
Personal finance comparison site finder.com gathered an expert panel consisting of six academics, economists and currency experts, and asked them for their predictions on how the pound may fare in 2023, against a backdrop of geopolitical uncertainty.
Northern Ireland deal is essential for the pound’s success
When asked, before today’s news, what would contribute to the “best case scenario” for the pound, 5 out of 6 panellists said that they believe the Northern Ireland Protocol needs to be resolved in order to strengthen the pound and reach the best case scenario of £0.83 against the euro.
While an agreement was announced this afternoon, political parties will now take time to look at the deal in more detail before voting.
John Wilson, professor of banking and finance at the University of St Andrews, said “Resolution on the Northern Ireland protocol and the improved function of the The Trade and Cooperation Agreement” would be key to strengthening the pound against the euro.
Echoing this sentiment, Alexander Tziamalis, senior lecturer in economics at Sheffield Hallam University, said a successful year for the pound relied on “[A] Steady UK government, resolving the NI protocol dispute, relatively harder recession in the EU compared to the UK”.
The UK economy needs a quick recovery to strengthen against the euro
The panel believes that a realistic “best case scenario” could see the pound fall to £0.83 (-5.5 per cent) against today’s rate of £0.88, which would be a significant boost to the pound’s strength.
Jon Ostler, CEO at finder.com, said the UK economy would “need to recover faster than the EU’s and the NI dispute be resolved” for this scenario to happen.
Jonas Goltermann agreed with this.
He said a best-case scenario could happen if the UK economy “rebounds strongly in the second half of 2023 and the BoE signals a ‘higher for longer’ approach to interest rates while the ECB signals a less aggressive policy stance.”
A loss in value to £0.90 is the most likely outcome at the end of the year
The panel was also asked what they thought the most likely price for the pound against the euro would be at the end of the year, and the average value was £0.91 against €1. This would be a loss in value of close to 3 per cent compared to what it was this morning (£0.88).
Citing potential headwinds other than the Northern Ireland protocol, Keith Kilcourse, money transfer expert at finder.com, said “A weak economy, employment and housing market could put pressure on BoE to cut rates faster than others”.
“The UK doing significantly worse than the eurozone in fighting inflation” could also be a factor according to Gulcin Ozkan, professor of finance at King’s College London, who also thinks that the eurozone’s rate hikes are likely to last longer.