The British pound is heading for its worst monthly performance since late 2016 against the dollar and its worst month against the euro since mid-2021, with fears that the British economy will slow sharply while inflation has prompted investors to sell the currency.
As of 0930 GMT, the pound was down 4.4% for August and finally at $1.1645, which would outpace the 4.3% loss in April. On Monday, the British pound fell to its lowest level since March 2020, when panic hit markets over the spread of the Corona virus.
Despite a slight rebound on Tuesday to 85.82 pence against the euro, the British currency fell 2.2%, putting it on track for its weakest month since April 2021, according to Reuters.
The weakness against the euro, which has been hurt by fears of shortages and rising natural gas prices, comes underscoring the extent of market nervousness over Britain.
Inflation has reached 10% and is expected to rise further, adding pressure on the salaries of the hardest-hit consumers. British government bonds are also on their way to their biggest monthly decline since 1994 as investors dump bonds.
Scotiabank's chief FX strategist, Sean Osborne, said financial markets are now indicating the Bank of England will raise interest rates to 4.25% next year, up from 1.75% now.
"This would make the Bank of England's interest rate among the highest in the major economies, but this may not adequately compensate investors for inflation which is expected to hit double digits early next year while the economy tends to stagnate," he said.
"Apart from the risks of stagflation, the pound will not react well to renewed stock market weakness as central banks continue to raise interest rates...while the domestic political background remains unhelpful," he added, noting the pound's downside risks at 1.10. US dollars, and 90 pence per euro in the next few months.
UBS Global Wealth Management said on Tuesday it expects the GBP/USD exchange rate to reach $1.12 by the end of the year, with the hawkish Federal Reserve driving the dollar higher.
Adding to the tension around the pound is the election of a new Conservative Party leader and prime minister.
The winner will be announced on Monday, and some economists worry that the massive tax cuts pledged by frontrunner Liz Truss could increase pressure on public finances at a time when the cost of servicing government debt increases.
“The new leadership is likely to reveal a significant financial boost to the economy to reduce the tax burden and provide assistance to households. This may provide some brief respite for the pound but a significant rebound in sterling looks out of reach at this point,” Osborne said, adding that slight gains are in the next few weeks. It may attract renewed selling pressure."
The Source
- Agencies