As UK recession fears grow, the pound falls to a 37-year low against the dollar

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Sterling fell to its lowest level against the dollar since 1985 on Friday, as a round of weaker-than-expected data on UK retail sales fueled fears that the country was heading for a prolonged recession.

The pound fell as much as 1% to $1.135, breaking through the $1.14 barrier for the first time in nearly four decades. It recovered to just above $1.14 in New York trading, but it remains down nearly 16% in 2022.

The currency’s sharp decline reflects the dollar’s broad and powerful rally this year, as well as specific concerns about the UK economy. Sterling was down about 0.5% against the euro on Friday, trading at €1.141, taking it down about 4% this year.

According to data released on Friday by the Office for National Statistics, retail sales fell sharply in August as UK consumers struggled with rising prices and high energy costs. The amount of goods purchased in the UK fell 1.6% between July and August, reversing a small increase in the previous month.

This was a larger drop than the 0.5% contraction predicted by economists polled by Reuters, and it was the largest drop since July 2021, when Covid-19 hospitality restrictions were lifted.

According to the ONS, rising prices and cost of living pressures are affecting sales volumes, which have been on a downward trend since the summer of 2021, when the economy reopened following pandemic lockdowns.

The figures demonstrated how high inflation has impacted consumers and the economy as a whole. The government’s £150 billion energy assistance package announced this month is expected to mitigate the impact of the recent surge in gas prices, but it does not eliminate the risk.

According to Bank of England data, the effective sterling exchange rate, which is weighted to reflect the currency’s strength against major trading partners, has fallen 6.5% since the beginning of the year. The gauge is still above its historic lows from 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 inflation nearly five times its 2% target.

However, Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, believes that the Bank of England will raise interest rates by 0.5 percentage point next week, rather than the 0.75 percentage point increase that some had predicted.

The US Federal Reserve is widely expected to raise rates by at least 0.75 percentage point next week, and a smaller rate hike by the Bank of England could reduce the allure of holding the pound even further.

In a sign of the UK economy’s struggles, the quantity of goods purchased by consumers was nearly back to pre-pandemic levels, down from a peak of nearly 10% above those levels in April 2021.

All major sectors fell during the month, but non-food stores were the most significant contributor. This is due to significant drops in sales at department stores (down 2.7%), household goods stores (down 1.1%), and clothing stores (down 0.6%).

While the reopening of the hospitality sector had a particularly negative impact on food sales, the ONS reported that “in recent months, retailers have highlighted that they are seeing a decline in volumes sold due to increased food prices and cost of living impacts.”

Fuel sales fell 1.7% and were 9.0% lower than pre-pandemic levels, reflecting the impact of soaring gas prices on car trips, despite some price relief in August compared to the previous month. With a difficult winter ahead, retailers will be concerned that shoppers have already cut back on their spending despite the hot summer.

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