The British pound fell to its lowest level in nearly four decades against the U.S. dollar on Friday after a surprise jump in retail sales sparked a fresh wave of recession fears for the British economy.
Sterling fell as low as $1.1353 in morning trading and was down 0.59% to exactly $1.14 at last check. It last fell below $1.14 in 1985, when the dollar surged due to rising interest rates and tax cuts by the Reagan administration.
Official UK data released on Friday showed that purchases of goods fell 1.6% in August, a sharper drop than the 0.5% decline economists had forecast.
The data adds to investor fears that a sharp decline in consumer spending, a key driver of the UK economy, could push the country’s economy into recession.
A consumer slump could limit the Bank of England’s ability to raise interest rates as it tries to get double-digit inflation under control, analysts said. Rising rates tend to strengthen the currency as they offer higher returns to foreign traders and attract investment.
“The softening consumption picture serves as a reminder of the challenges facing the UK economy as the Bank of England raises rates into recession,” ING global head of markets Chris Turner told Insider.
“As a growth-sensitive currency, this is a particularly challenging time for the pound and indeed at the moment we are seeing independent pound weakness.”
The Bank of England struggled to keep pace with the Federal Reserve’s tightening campaign. The U.S. Federal Reserve raised rates by 75 basis points in consecutive sessions, helping the dollar recover against other currencies including the pound, the euro and the Japanese yen.
“The UK consumer base is weaker, which means it may be seen as too risky to raise rates at the same pace as our transatlantic friends, which would keep downward pressure on the pound,” Hargreaves Lansdown principal analyst Sophie Lund-Yates. he said.
The fall in the pound is increasing pressure on the UK central bank ahead of its September meeting.
The BoE’s monetary policy committee was due to meet on September 16. But he delayed a decision on the interest rate for a week as the UK entered a 10-day period of national mourning following the death of Queen Elizabeth II.
Deutsche Bank’s George Saravelos said on Friday that “a hawkish turn is needed to help protect” the pound in Thursday’s session.
“The exchange rate is vulnerable to extreme dislocation unless the Bank of England accelerates its response,” he added.
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