The pound fell to a two year low against the dollar, reflecting traders’ growing concerns about recession in the world as oil prices rise.
Analysts said that sterling is weakening because markets are concerned about the future growth of the UK economy.
They predicted that Sterling would fall further as economic stagnation is forecast and inflation increases.
London shares gained some ground Wednesday after Tuesday’s fall.
Jane Foley, Rabobank’s head of currency strategy, said that the resignations of two top government ministers, including Rishi Sunak, on Tuesday night were not significant in the pound’s fall.
She stated that the market is more concerned about growth than what this government will do. “The news didn’t cause too many additional woes.”
Tuesday’s drop below $1.19 was the first since March 2020 when the first UK Covid lockdown took place.
The weaker pound makes imports, such as food, more expensive and pushes up petrol prices at the pumps. This also means that UK tourists get less value for their money abroad.
But, products and services from the UK that are exported can be more appealing to foreign customers.
On Wednesday, the pound-to-dollar rate was flat, but markets rose in London, Europe and elsewhere, with some analysts claiming that they are resetting to lower levels.
London’s FTSE 100 stock exchange fell by almost 3% Tuesday. However, it rose by around 1% Wednesday morning.
Russ Mould is AJ Bell’s investment director. He said that markets could have regained some ground if investors had given up on the idea of a corporation tax increase in 2023.
He also suggested that it could be possible that stocks were “oversold.”
Due to the US interest rate increases and investors seeing it as a safe investment, the dollar is performing well.
“Many people are concerned about recession – recessions in the US and Europe, and ofcourse we’ve got our cost-of-living crisis here in the UK,” Ms Foley stated.
She stated that Sterling is still weak despite the fact the Bank of England having hiked interest rates five more times in this cycle. “The reason is that the market remains very concerned about the UK’s growth outlook.”
She said that Sterling could drop even more. Investors are concerned by the lack of UK labor, which she stated has not returned to pre-pandemic levels because “we’ve lost many workers”.
Many people fled the labour market after the pandemic. Due to Covid and Brexit, many of the foreign workers who left were not able to return.
George Godber, Polar Capital’s fund manager, stated that gas prices would rise further in the coming year. “Our companies are struggling to cope with this deteriorating economy outlook. How can consumers and businesses plan for rising gas prices and the squeeze in energy [prices] as we see in the December contract?
BBC reported Tuesday that UK household energy bills will rise to PS3,000 per annum this winter.
According to Mr Godber, the recent drop in sterling was also due to the UK government “aggravating Northern Ireland protocol”.
Investors are concerned that the government could endanger parts of the post-Brexit trade arrangements for Northern Ireland due to the growing dispute. This could lead to a trade war.
He said that international investors do not like this and it puts pressure on the Pound, which in turn feeds into the economy. The weak sterling means that petrol prices have risen.
Russ Mould stated that international investors were also concerned by plans of the UK government to amend human rights laws to make it easier for asylum seekers to be sent to Rwanda.
Prices at the pump for petrol fluctuate mainly due to crude oil prices and how the pound performs against the dollar. Crude oil is traded in dollars.
Nadhim Zahawi was appointed as Chancellor on Tuesday. He stated that Prime Minister Boris Johnson was focusing on “delivering”.
“How can we rebuild the economy after the global pandemic and how can we ensure that the economy is resilient to the shock caused by the energy price shock by [Russian President] Putin?
“How can we manage inflation and tax burdens?” Mr Zahawi stated.
He said that tax cuts are possible. Companies make long-term investment decisions. Corporation tax is one of the taxes that they can compare worldwide. I want to carefully examine all the options that I have to bring down inflation and return to a dynamic economy that produces growth.
Sir Jon Cunliffe was a deputy governor of Bank of England and stated to Today that the Bank would do whatever it needed to ensure the rising cost of living does not become a problem in the long-term.
He stated that the Bank had predicted the UK’s economy would not grow in the next year and repeated Bank warnings to companies about allowing wages “to spiral” to help people deal with rising prices.
He said, “It is our job to ensure that, as this inflationary shock through the economy, at time when we also need a tight labor market, we don’t find that the combination a strong shock in international energy prices with domestic factors leaves us with inflation becoming the new normal.”
“People can be confident that we will take action to ensure that that doesn’t happen.”
