The pound is having its worst month since last year’s mini-budget crisis due to recession fears
- Sterling fell about half a cent to as low as $1.2157 on the pressure
The pound fell to a six-month low against the dollar last night as it headed for its worst month since the mini-budget crisis last September on fears of a recession.
Sterling fell about half a cent to as low as $1.2157 as pressure mounted on the currency after the Bank of England decided to leave interest rates unchanged last week.
And while many observers believe that interest rates in the UK have peaked, it is believed that there could be further rate hikes in the US, which would strengthen the dollar.
The pound has fallen 4 percentage points against the greenback so far this month, roughly in line with the decline in the same month last year.
It reflects Britain’s worsening economic outlook. A monthly PMI economic survey last week showed output fell by the most since January 2021, and GDP numbers showed the economy contracted 0.5 percent in July.
The pound hit a six-month low against the dollar last night, heading for its worst month since the mini-budget crisis last September (file image)
That weakness contributed to the bank putting the brakes on rate hikes last week after 14 straight hikes.
In contrast, America’s robust growth means experts are betting that interest rates are more likely to rise in the US than in the UK.
The Federal Reserve also left interest rates unchanged last week.
But the Fed’s signal that interest rates will stay higher for longer has pushed the dollar higher this month, while U.S. bond yields are at their highest since 2007.
Jamie Dimon, head of investment bank JP Morgan, made it clear yesterday that he is worried about what might happen if the Fed were to raise interest rates to 7 percent amid a combination of weak growth and high inflation.
“Warren Buffett says that when the tide goes out, you find out who’s swimming naked,” Dimon said.
“That will be the low tide.”
Sterling’s weakness is a far cry from that of the start of the year, when it was hailed as the best-performing pair in the G10 group of major currencies.
The pound rose above $1.31 in July. But experts from Goldman Sachs and Nomura now assume that the price could fall to $1.18.
Joe Tuckey, head of FX analysis at Argentex, said: “Just eight weeks ago, the pound continued its impressive rally, driven by solid economic data and an unwavering hawkish stance from the Bank of England, which announced three further interest rate hikes in the fight against stubborn inflation indicated.”
“Since then, a very poor PMI and a series of other weaker data have dented confidence in the pound and, more importantly, led the BoE to be far more cautious on interest rates, which was so evident last week, than the Bank decided not to raise interest rates.” .’
Kit Juckes, head of foreign exchange strategy at Societe Generale, said the pound was on track to become the weakest of the G10 currencies this month. The pound’s decline comes a year after it slipped 3.98 percentage points in September 2022.
This sell-off was caused by then-Prime Minister Liz Truss’ disastrous mini-budget, which saw sterling fall to a record low of under $1.04 before recovering.