Pound in biggest monthly decline against dollar since 2016

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Pounds and dollars

Concerns about the outlook for the UK economy saw the pound slide 4.6% against the US dollar in August.

The last time the pound fell this much against the dollar was in October 2016, in the wake of the Brexit vote.

Sterling sank again on Thursday morning, dipping below $1.16 in foreign exchange markets.

Analysts said the drop reflected a gloomy outlook for the economy, with consumers and businesses grappling with rising prices and soaring energy bills.

The Bank of England has predicted that the UK will fall into recession towards the end of this year.

The weak pound means Brits traveling abroad will find their spending money won’t stretch as far.

August was also the worst month for the pound against the euro since the middle of last year.

“Our economic outlook doesn’t look particularly good compared to the rest of the world,” said Laura Lambie, senior investment director at Investec.

Ms Lambie said recession fears were weighing on markets, with investment bank Goldman Sachs warning this week that the UK could remain in recession until 2024.

A recession is defined as the contraction of the economy for two consecutive three-month periods.

“terrible month”

Fears have grown about the outlook for the UK economy after data showed it contracted between April and June, with businesses and households feeling the impact of rising prices.

Those concerns were fueled on Thursday, with a new study suggesting that the manufacturing sector contracted in August for the first time since May 2020.

Separately, a report by the Resolution Foundation think tank said typical household disposable incomes are set to fall by 10%, or £3,000, this year and next, in what it called “the deepest squeeze on living standards in a century”.

The cost of living crisis is expected to be the biggest challenge facing the new prime minister.

Both Rishi Sunak and Liz Truss have been pressed to outline how they would support households if they manage to get the keys to number 10.

Pound vs dollar chart

Pound vs dollar chart

“Gloomy forecasts of poverty spreading across the UK this winter highlight the deeper woes for the UK economy,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

The Bank of England raised interest rates to 1.75% in August while predicting the UK economy will fall into recession this year.

However, Ms Streeter predicts the Bank of England may be forced to slow rate rises in the coming months given the cost of living crisis.

Dollar power

The pound’s weakness is also a result of the strong dollar, analysts said.

The dollar has been performing strongly due to increases in US interest rates and because investors see it as a safer bet.

Last week, the head of the country’s central bank, the US Federal Reserve, said it would push ahead with further interest rate hikes as it tries to control inflation.

“The dollar has been extremely strong,” Ms Lambie said.

“Also, the energy issues we’ve had in Europe don’t have the same impact as the US, and I think economists agree that the US will be the last to go into recession if it goes into recession at all. , perhaps following the UK and Europe.

“So on both sides, the sterling side and the dollar side, that’s really what has weakened sterling and strengthened the dollar.”

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