Sterling hits 37-year low as the British economy slumps
The currency fell below $1.14, its lowest since 1985, after the Office for National Statistics said retail sales in August fell 1.6% month-on-month, the biggest drop since December 2021 and much worse than economists had expected.
“I think the UK is already in a recession,” said Michael Hewson, chief market analyst at CMC Markets UK.
The British pound was affected by a series of weak economic data, but also the sharp rise of the US dollar, which is a safe investment that sees inflows in times of uncertainty. The dollar is now approaching its strongest level in nearly two decades against a basket of major currencies, buoyed by expectations of another interest rate hike by the Federal Reserve next week.
But the UK’s economic outlook means the pound is suffering the most. It has lost more than 15% of its value against the dollar this year, compared to a 12% drop in the euro.
Investors were also frustrated by indications that the government It will pay for its energy programme, which could cost up to 150 billion pounds ($171 billion), via the sharp increase in the UK’s national debt. Chancellor Kwasi Kwarting is expected to provide more details next Friday.
The UK generally imports more than it exports. This means that weak sterling raises the cost of fuel, food and other goods, making it difficult for the Bank of England to adjust rates.
The central bank, which is due to make its latest policy announcement on Thursday, was He raised interest rates aggressively in a determined attempt to bring down inflation, which hit 9.9% in August.
It now faces a major dilemma: another big increase in borrowing costs could weigh on the economy even more. However, not keeping up with the Fed could push the pound further down.
Hewson said he believes the pound will now fall towards $1.10 after breaking the $1.14 mark.