In Focus: Fixed income  

'A chilling repeat of a dismal day' as pound plunges on recession fears

'A chilling repeat of a dismal day' as pound plunges on recession fears

The pound has reached its lowest level against the dollar for 37 years on Friday, as it fell to $1.13 following weak retail sales data.

Retail sales fell faster than expected in August amid rapid price increases which subdued spending, igniting fears of a long recession and sending the pound to its four-decades low against a strong dollar.

Data published by the Office for National Statistics showed sales levels were down in all of the main sectors, with food sales down 0.8 per cent and non-food sales down 1.9 per cent over the month.

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The pound dropped about 1 per cent against the dollar on Friday, reaching a low of 1.135 before rebounding slightly.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: "It’s Bleak Friday for the pound, amid worries the UK has hurtled into recession, as the cost-of-living crisis intensifies and confidence in the government’s ability to prompt an economic turnaround fades.

"It’s a chilling repeat of the dismal day, 30 years ago, when sterling faced another crisis and spectacularly crashed out of the European Exchange-Rate Mechanism. Three decades on, Black Wednesday has a new rival in the notoriety stakes for the pound.

"This time its decline is being sparked not just by a deteriorating UK economy, but a mighty dollar and the fearless approach by the Federal Reserve in hiking rates."

Walid Koudmani, chief market analyst at financial brokerage XTB, said: "While dollar strength is certainly playing into it with the Fed taking significant action to contain inflation, the precarious situation the UK economy finds itself in, further highlighted by today's retail sales report, is not helping either.

"The Bank of England has a tough job ahead of it as it must strike the balance between managing inflation, supporting the currency while simultaneously not negatively affecting the overall economy further."

Streeter expects the pound's weakness will mean the Bank of England won’t be as bold at raising rates, despite concerns the new prime minister's economic policies could cause inflation to stay higher for longer.

Liz Truss has already pledged £30bn of tax cuts and help with problems such as the energy crisis.

As many of Truss's pledges are unfunded, at rising interest rates this could mean a costly debt burden for the UK economy, whose public sector net debt already runs at 96 per cent of GDP, according to the ONS.

Streeter said: "The Trussenomics solution to a contracting economy is widespread tax cuts and a shock and awe push to reduce energy bills.

"But there are concerns in financial markets that this big slash and spend policy won’t just add to the UK’s growing debt pile but will also make the Bank of England’s task of lowering demand in the economy and reining in inflation that much harder.

"That is likely to mean that rates will have to stay higher for longer, hampering future growth prospects even more."