The pound fell to a 37-year low on Friday after new data showed shoppers are cutting spending as inflation squeezes household budgets, underscoring fears that the economy could be slowing down. be narrowed.
The currency fell below $1.14, the lowest since 1985, after the Office for National Statistics said retail sales in August fell 1.6 percent from the previous month, the biggest drop since. from December 2021 and significantly worse than economists predicted.
Michael Hewson, head of market analysis at CMC Markets UK, said: “I think the UK is in a recession.
The pound has been hit by a string of weak economic data, as well as a strong appreciation in the US dollar, a safe-haven investment that sees inflows in times of uncertainty. . The greenback is currently near its strongest level in about two decades against a basket of leading currencies, bolstered by expectations of another major interest rate hike by the Federal Reserve next week.
But the economic outlook in the UK means the pound is suffering more than most. It has lost more than 15% of its value against the dollar this year, compared with a 12% drop for the euro.
A plan by Chancellor Liz Truss to subsidize energy bills for households and businesses may ease the pain this winter, but may not be enough to restore growth. The Bank of England has forecast a prolonged recession.
Investors have also been unsettled by signs that the government will pay for its energy program, which could amount to 150 billion pounds ($171 billion), by drastically increasing the UK’s national debt. Prime Minister Kwasi Kwarteng is expected to provide more details next Friday.
The UK usually imports more than it exports. That means a weaker pound will drive up the cost of fuel, food and other commodities, making it harder for the Bank of England to control prices.
The central bank, which will make its latest policy announcement on Thursday, has aggressively raised interest rates in a determined attempt to bring down inflation, which stood at 9.9% in August.
Now it faces a major dilemma: Another big increase in borrowing costs could weigh on the economy. However, failure to keep up with the Fed could push the pound even lower.
Hewson said he believes the pound will now fall to US$1.10 after breaking the US$1.14 mark.