Sterling hit a 37-year low against the dollar as recession fears mount

Sterling fell to its lowest level since 1985 against the dollar on Friday after a round of weaker-than-expected data on UK retail sales amplified fears that the country is heading into a prolonged recession.

Sterling fell 0.8 percent in morning trade in London to $1.137, the first time it had breached the $1.14 level in nearly four decades, according to Refinitiv data. The move reflects the broad strength of the dollar as well as particular concern about the state of the British economy.

The pound was down about 0.4 percent against the euro at €1.142, its weakest level since early 2021.

Retail sales fell sharply in August as UK consumers struggled with higher prices and higher energy costs, according to data released Friday by the Office for National Statistics. The amount of goods purchased in the UK fell 1.6 per cent between July and August, reversing a small expansion in the previous month.

That was a bigger drop than the 0.5 percent contraction expected by economists polled by Reuters and the biggest drop since July 2021, when Covid-19 restrictions on hospitality were lifted.

Olivia Cross, an economist at Capital Economics, said the numbers indicated that “downside momentum is building rapidly” and supported her view that “the economy is already in a recession.”

The Office for National Statistics said that “rising prices and the cost of living” are affecting sales volumes, which have continued their downward trend since the summer of 2021, after the economy reopened after the pandemic shutdown.

The numbers highlighted how high inflation has affected consumers and the economy in general. The government’s £150 billion energy support package announced this month is expected to cushion the blow from the recent rise in gas prices, but it has not dissipated recession risks.

Victoria Scholar, head of investment at Interactive Investor, said the fact that the pound fell against both the dollar and the euro on Friday shows “this is not a movement in the dollar… but in reality, traders are selling the pound amid negative sentiment towards the economic outlook and the investment situation in the kingdom.” United”.

The Bank of England data also shows that the effective exchange rate of the British pound, a likely measure to take into account its competitiveness against major trading partners, has fallen by 6.5 per cent since the start of the year. The measure is still above historic lows reached in 2020 and 2016.

The Bank of England is expected to raise interest rates for the seventh time in a row at its meeting next week as it deals with an inflation rate close to five times its 2 per cent target.

However, the weak retail sales numbers could point the Bank of England toward a 0.5 percentage point increase when policymakers meet next week, rather than the 0.75 percentage point increase some have been expecting, said Gabriella Dickens, chief UK economist at Pantheon Macro Economics. .

The US Federal Reserve is widely expected to raise interest rates by at least 0.75 percentage points next week, and a Bank of England rate hike could further impact the attractiveness of holding the pound.

In a sign of the British economy’s struggle, the amount of goods purchased by consumers has almost fallen to pre-pandemic levels from a peak of about 10 per cent above in April 2021.

Line graph for Great Britain, February 2020 = 100 showing retail sales falling more than expected in August

All major sectors declined during the month, but non-food stores were the biggest mover. This is due to the significant decrease in sales in supermarkets, down 2.7 percent, household goods stores, down 1.1 percent, and clothing stores, down 0.6 percent.

Sophie Lund Yates, an analyst at financial services firm Hargreaves Lansdowne, said the observed declines in sports equipment, furniture and lighting gave “a signal to the kinds of items consumers are pushing down their priority list in tough times.”

Online sales also fell sharply, by 2.6 percent, with food being the third largest component of the monthly decline.

While food sales were particularly affected by the reopening of the hospitality sector, the Office for National Statistics reported that “in recent months, retailers have confirmed that they have seen a decrease in sales volumes due to increased food prices and cost-of-living impacts.”

Fuel sales were also down 1.7 percent, and were 9 percent below pre-pandemic levels, reflecting the impact of higher prices at the pump on car trips despite some declines in prices in August compared to the previous month.

“With winter difficult, it will be a concern for retailers that shoppers have already curbed their spending despite the hot summer,” said Linda Petherick, retail lead at consultancy Accenture.

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