THE pound remained under intense selling pressure today as global investors backed the dollar leaving sterling on track for its worst month since Liz Truss’s disastrous mini-budget a year ago.
Sterling fell to $1.121, down from $1.24, its lowest since March following the collapse of Silicon Valley Bank and Credit Suisse.
Last week’s surprise call by the Bank of England to pause interest rate rises is spooking currency markets, while the US Federal Reserve seems open to more rate increases.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: “The pound is continuing its downward slide against the dollar and is hovering around the lowest point since mid-March, as expectations for future interest rate policy in the UK and the US diverge. Demand appears to be seeping out of the UK economy faster than in the US. While the Bank of England has kept the door open to another hike, it’s not looking likely, while the Fed has flagged another interest rate rise is likely this year with higher rates set to stay for longer.”
Sterling’s weakness will increase the cost of imports which could in turn increase inflation – bad news for both Bank of England rate setters and the government.
ING said in a note to clients: “The dollar is finding more strength thanks to a soft risk environment and attractive real rates after the bond selloff. We now see downside risks for EUR/USD potentially extending to 1.02 in a bond sell-off acceleration.”
ING added: “The dollar is enjoying another widespread rally, shrugging off yesterday’s unconvincing US consumer confidence figures while being boosted by a round of defensive re-positioning amid a deteriorating risk environment. Furthermore, the recent treasury selloff has kept fuelling the real rate attractiveness of the dollar, reinforcing the greenback’s role as the go-to currency in the current market’s environment.”
The pound is now down 7% against the dollar in the last nine weeks from $1.31.
Analyst George Vessey at Convera said. “The prospect of ‘higher for longer’ interest rates in the U.S. has pushed U.S. bond yields higher, which sucks foreign capital into U.S. bonds, thus driving the Dollar higher.
"Surging US Treasury yields as a result of US exceptionalism is keeping dollar demand buoyant, but the pound is also being sold across the board as UK gilt yields slide with UK rate expectations," he said:
Adding to the gloom, former MPC member Adam Posen said the UK economy will shrink this year and next due to stubborn inflation and a shortage of workers.
The UK economy will shrink this year and in 2024, according to Posen who said stubborn inflation and a shortage of workers would damage the prospects for growth more than most analysts expect.
Now at the Washington-based Peterson Institute for International Economics (PIIE) he said a drop in GDP this year of 0.3% would be followed by a fall of 0.2% next year while the eurozone and the US were on course for growth.
The UK has repeatedly defied predictions it will fall into recession however.
Matthew Ryan, Head of Market Strategy at global financial services firm Ebury, said:
“Both the euro and sterling have slumped to six-month lows on the US dollar this week. While the moves can be largely attributed to a strong greenback, both currencies are currently underperforming their G10 counterparts. Aside from valuation, concerns over the state of both economies have contributed to the sell-offs. Economic news out of the UK, in particular, has turned decidedly bleak in recent weeks.”
