Pound Falls to Two Year Low Against the Dollar

The BBC are reporting that the pound has fallen to a two-year low against the dollar reflecting traders’ increasing concerns about recession around the world as energy prices continue to soar.

But sterling is also weak because markets are worried about future UK economic growth, analysts said. Sterling could fall even further after predictions of economic stagnation and as inflation rises, they added.

London shares regained some ground on Wednesday following Tuesday’s falls.

The resignation of two senior government ministers on Tuesday evening, including former Chancellor Rishi Sunak, was not a significant factor in the pound’s fall, Rabobank head currency strategist Jane Foley told the BBC Radio 4 Today programme. “The market is so much more concerned with growth, and what is this government going to do… the news in itself didn’t create too many additional woes,” she said.

On Tuesday the pound fell below $1.19 for the first time since March 2020, when the first UK Covid lockdown was brought in.  The pound to dollar rate was flat on Wednesday, while markets rose in London and Europe, with some analysts saying they were resetting to a lower level.

The FTSE 100 stock market in London, which fell nearly 3% on Tuesday, rose by more than 1% in morning trading on Wednesday.

Russ Mould, investment director at AJ Bell, said markets could have regained some ground on investor hope that a planned corporation tax rise in 2023 could be scrapped. It could also be that stocks were “oversold” on Tuesday, he added.

The dollar is performing strongly due to US interest rate rises and because investors see it as a safe bet.

“Now many people are worried about recession – recession in the US, recession in Europe, and of course we’ve got our cost of living crisis here in the UK,” Ms Foley said. “Sterling is still weak on its own, and that is despite the fact that the Bank of England have hiked interest rates five times this cycle already, and the reason for that is that the market is very concerned about the growth outlook here in the UK,” she said.

Sterling could fall even further, she said. One of the issues concerning investors is the shortage of UK labour, which hasn’t gone back to pre-pandemic levels “because we’ve lost a lot of workers”, she said.

Many people left the labour market during the pandemic, and due to a combination of Covid and Brexit, foreign workers who had left did not return.

George Godber, a fund manager with Polar Capital, said gas prices were set to rise even further later in the year: “Our companies are struggling with this deteriorating economic outlook. How do businesses and consumers plan for rising gas prices, and the squeeze in energy [prices] that we’re seeing in the December contract for gas?”

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