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Business Insider Bangladesh

Pound slides to two-year low against US dollar

BI Desk || BusinessInsider

Published: 14:04, 6 July 2022  
Pound slides to two-year low against US dollar

Photo: Collected

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 as markets worry about future UK economic growth, analysts said.

Sterling could fall even further after predictions of economic stagnation and as inflation soars, they added, reports the BBC.

London stock markets also fell on Tuesday on worries about UK growth.

But 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 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.

The FTSE 100 stock market in London fell nearly 3% on Tuesday before rising by more than 2% in early trading on Wednesday.

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?"

On Tuesday the BBC reported that UK household energy bills are heading to £3,000 per year this winter.

The recent fall in sterling also came about by the UK government "aggravating the Northern Ireland protocol", Godber said.

Investors have been worried that the escalating dispute over the post-Brexit trading arrangements for Northern Ireland risks seeing the government scrapping parts of that deal, which could trigger a trade war.

"International investors don't like that, and it puts a lot of pressure on the pound, and that in turn feeds through to the economy," he said. "The petrol prices are high because sterling has been weak."

Changes in prices at the pump for petrol are mainly down to the price of crude oil, and how the pound is performing against the dollar, because crude oil is traded in dollars.