The pound has fallen to a two-year low against the dollar as worries about the future of the UK economy mount amid rising prices and falling consumer confidence.
On Tuesday, sterling fell below $1.19 for the first time since March 2020, when the government announced the first COVID lockdown.
It came as Boris Johnson’s government fell further into chaos following the resignation of senior figures including Chancellor Rishi Sunak. In a farewell shot at the prime minister, Mr Sunak said part of his reason for stepping down was that the government needed to be honest that the road to a better future was “not easy”.
Ross Mould, Investment Director at AJ Bell, said: “The pound slipped before the UK government fell into chaos, but the resignations of Rishi Sunak and Sajid Javid added to the currency crisis as they disrupted a cabinet. Is.”
“Recession fears have weighed on the pound in recent months and the currency is now at a two-year low against the dollar as inflation continues to hurt consumers and businesses.
“Political chaos is adding another layer of uncertainty to recession fears, so it’s not surprising that the pound is falling.
CPI inflation hit 9.1 percent in May and is expected to rise to 11 percent later this year, meaning households are facing a significant drop in living standards as wages, gas, electricity and food costs rise. unsustainable.
A weaker pound will continue to push prices higher as the UK relies on imports for its energy and food.
Consumer confidence has hit its lowest level on record, according to a long-running Growth From Knowledge (GfK) survey, while auto sales fell to their lowest level since 1996 in June. The construction industry is also slowing, new industry figures show.
The Bank of England said on Tuesday that the outlook for the UK economy had “significantly” deteriorated since Russia invaded Ukraine.
Sterling’s decline against the dollar is also being driven by a strengthening US currency. A sharp rate hike by the US Federal Reserve has boosted the dollar, raising investors’ yield expectations.
At its most recent meeting, the Federal Reserve raised interest rates by 0.75 percent to curb inflation.
The Bank of England acted more cautiously, raising interest rates by 0.25 percent to 1.25 percent last month.
Policymakers have indicated more hikes are planned, with Deputy Governor Sir John Cunliffe saying on Wednesday the bank would do “whatever is necessary” to bring inflation under control.
While higher interest rates can help ease upward pressure on prices, they will further squeeze household budgets by making borrowing more expensive.
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