The pound could soon be heading towards parity with the dollar, unless British politicians can offer a credible "Plan B" to deal with the outcome of the Brexit vote, Allianz economist Mohamed El-Erian said on Thursday (7 July).
The pound hit two 31-year lows in as many days against the greenback earlier this week and El-Erian, the former chief executive of Allianz-owned investment manager Pimco from 2007 to 2014, warned the slump could continue unless the UK government got its act together.
He stressed Britain needed a "Plan B", which would have to include a free trade agreement with the EU. "After the Brexit referendum, the UK has to urgently get its political act together," El-Erian was quoted as saying by Reuters.
"'Plan B' depends on the politicians in London and across the Channel, but so far they have not stepped up to their economic governance responsibilities."
Doubts over future investments and trading relations, coupled with the Bank of England's inability to rise interest rates due to the falling pound, made the outlook for the British currency even more complicated. "Think of sterling as facing a double whammy with no strong anchor," El-Erian said.
"The future value of sterling is a function of how and how quickly the structural uncertainty is resolved – if Plan B is delayed and/or it doesn't involve much of a free trade set-up with the EU, it is not inconceivable for sterling to head to parity with the US dollar.
"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."
The last time the pound neared parity was in February 1985, when international permutations sent the dollar soaring to $1.0438 versus the sterling.