British pound could near parity with the US dollar next year as energy crisis sends economy into recession, analyst says

The British pound sterling could slide to a new record-low against the US dollar next year as the UK economy heads toward a likely recession.

Europe’s energy crisis will push the both the eurozone and UK into recession while the US experiences a milder slowdown, Capital Economics chief UK economist Paul Dales wrote in a report Wednesday.

That sets up the euro and British pound to weaken further against the dollar, he added. The euro has already fallen below parity against the dollar, with one euro trading at $0.9938 on Thursday. And by next year, the pound could get close to parity too.

The pound-dollar exchange rate could fall to a record low of around $1.05 by mid-2023, Dales warned, down from about $1.15 on Thursday.

That would be even lower than levels reached before the Plaza Accord in 1985, when one pound traded at $1.09, he noted. That agreement saw France, West Germany, Japan, the UK and US agree to let the dollar depreciate.

Meanwhile, the pound continued to drop to begin the month of September after finishing August with a 4.5% decline against the dollar, marking its worst rout since the aftermath of the 2016 Brexit vote.

Most global currencies have dropped against the dollar as investors bet on more aggressive rate hikes from the Federal Reserve.

But the pound also fell 3% against the euro last month, as inflation reached a staggering 10.1% in the UK in July. The Bank of England thinks inflation will peak at 13.3% before the end of the year, and Goldman Sachs has warned UK inflation could even top 22% early next year.