In August, the pound lost 4.6% of its value versus the U.S. dollar due to concerns about the UK economy.
The last time the pound plummeted so significantly versus the dollar was in October 2016, following the Brexit referendum.
On Thursday morning, the value of the pound fell below $1.16 on currency markets.
According to analysts, the decline reflects the worsening economic picture, as individuals and businesses face rising prices and ballooning energy expenditures.
The Bank of England forecasts that the United Kingdom will enter a recession by the end of this year.
Due to the weak pound, British tourists will discover their spending money does not go as far abroad.
August was also the worst month since the middle of last year for the pound against the euro.
Laura Lambie, senior investment director at Investec, stated, “Our economic outlook is not especially bright in comparison to the rest of the world.
Ms. Lambie added that recession fears were dragging on markets, with the investment giant Goldman Sachs predicting this week that the UK could be in recession until 2024.
A recession is defined as two consecutive three-month periods of economic contraction.
‘Torrid month’
As a result of data indicating that the British economy contracted between April and June, and as businesses and households felt the impact of rising prices, concerns about the economy’s future have increased.
Thursday’s release of a new study indicating that the manufacturing sector contracted in August for the first time since May 2020 added to these concerns.
Separately, a report by the Resolution Foundation think tank predicts that typical household disposable incomes will fall by 10%, or £3,000, between this year and next. This is referred to as “the most severe squeeze on living standards in a century.”
The cost-of-living crisis will likely present the greatest challenge for the new prime minister.
Both Rishi Sunak and Liz Truss are under pressure to describe how they would assist families if they win the election for Number 10.
“Grim predictions about the rise of poverty in the United Kingdom this winter underscore the deteriorating state of the British economy,” “Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, remarked as such.
The Bank of England increased interest rates to 1.75 percent in August, while predicting that the British economy would enter a recession this year.
Given the rising cost of living, Ms. Streeter predicts that the Bank of England may be forced to slow rate hikes in the coming months.
Dollar strength
Analysts stated that the dollar’s strength also contributed to the pound’s decline.
The dollar is performing well due to rising US interest rates and investors’ perception of it as a safer investment.
To manage inflation, the chairman of the nation’s central bank, the Federal Reserve, hinted last week that additional interest rate hikes will be implemented.
Ms. Lambie stated, “The dollar has been unusually strong.”
“Also, the energy challenges we’ve had in Europe do not have the same impact as they have in the United States, and I believe economists agree that the United States will be the last to enter recession, if it enters at all, probably following the United Kingdom and Europe.
Therefore, on both the pound sterling and dollar sides, this is what has depreciated the pound and strengthened the dollar.
