The pound fell to a two-year low against the dollar due to growing recession concerns around the world as energy prices continue to rise.
Analysts said the pound, which was trading below $ 1.19 at one point, is also weak as markets are concerned about the UK’s future economic growth.
The pound could fall further after economic stagnation forecasts and rising inflation, they added.
Shares in London recovered after Tuesday’s lows.
The resignations of two top government ministers Tuesday evening, including former foreign minister Rishi Sunak, were not a significant factor in the pound’s decline, Rabobank chief currency strategist Jane Foley told BBC Radio 4 Today.
“The market is much more concerned about growth and what this government will do … the news itself hasn’t created too many additional problems,” he said.
On Tuesday, the pound fell below $ 1.19 for the first time since March 2020, when the UK’s first coronavirus lockdown was introduced.
It was trading at $ 1,189 at the end of trading in London on Wednesday afternoon, down from a two-year low of $ 1,187. It subsequently rose above $ 1.19. But the pound rose against a weaker euro, by 0.5% to 85.46 pence, on concerns over the economic fallout from rising energy prices.
A weak pound means that imports, such as food, become more expensive and drive up the price of gasoline at service stations. It also means UK tourists get less for their money when shopping overseas.
However, UK products and services sold overseas may be priced more attractive to overseas customers.
The exchange rate of the pound versus the dollar remained stable Wednesday as markets rose in London and Europe, with some analysts saying they were resetting to the downside. London’s FTSE 100 stock, which fell nearly 3% on Tuesday, managed to gain 1.2% on Wednesday to close at 7,107.77.
Russ Mold, chief investment officer at AJ Bell, said the markets may have regained ground in the hopes of investors that a projected corporate tax hike in 2023 could be ruled out.
It could also be that the shares were “oversold” on Tuesday, he added.
The dollar is performing strongly due to interest rate hikes in the US and because investors see it as a safe bet.
“Now many people are worried about the recession: the US recession, the European recession and of course we have our cost of living crisis here in the UK,” Foley said. “The British pound is still weak on its own, despite the fact that the Bank of England has already raised interest rates five times this cycle, and the reason is that the market is very concerned about the growth outlook. . here in the UK. ”he said.
The pound could drop further, she said. One of the problems that worry investors is the UK labor shortage, which has not returned to pre-pandemic levels “because we have lost so many workers,” she said.
Many people fled the job market during the pandemic, and due to a combination of Covid and Brexit, the foreign workers they left have not returned.
George Godber, fund manager of Polar Capital, said gas prices will rise further over the course of the year: “Our companies are struggling with this deteriorating economic outlook. fuel prices? ” The gasoline prices and the reduction in energy [prices] that we are seeing in the December gas contract? ”
On Tuesday, the Zlafilms reported that British households’ energy bills are heading to £ 3,000 per year this winter.
Sterling’s recent slide was also due to the UK government “exacerbating the Northern Ireland protocol,” Godber said.
Investors fear that the growing dispute over post-Brexit trade deals for Northern Ireland risks the government canceling part of that deal, potentially sparking a trade war. “International investors don’t like it, and it puts a lot of pressure on the pound, which in turn is reflected in the economy,” he said. “Petrol prices went up because the British pound was weak.”
Russ Mold said international investors are also concerned about the UK government’s plans to amend human rights law to make it easier to send asylum seekers to Rwanda.
The price changes at the petrol pumps are mainly due to the price of crude oil and the trend of the pound against the dollar, because crude oil is traded in dollars.
Foreign Minister Nadhim Zahawi, appointed Tuesday for the post, said Prime Minister Boris Johnson’s goal was to “deliver”.
“How can we rebuild the economy after exiting the global pandemic and, of course, how can we make sure the economy is resilient to the energy price shock due to the illegal invasion of Ukraine by the [Russian president]? in?”
“How do we deal with inflation in addition to tax cuts?” Mr. Zahawi said.
As for the tax cut, “nothing is out of the question,” he said. “Companies make long-term investment decisions. One of the taxes that you can compare all over the world is the corporation tax and I want to very carefully analyze all the measures I can apply to reduce inflation, but also to return to that dynamic economy that generates growth “.
Sir Jon Cunliffe, Deputy Governor of the Bank of England, told the Today Show that the bank would do “whatever it takes” to make sure the rising cost of living doesn’t become a long-term problem.
He said the Bank predicted the UK economy would not grow next year and repeated the Bank’s warnings to businesses to let wages “expire” to help people cope with rising prices.
“Our job is to make sure that while this inflationary shock hits the economy, at a time when we also have a strained labor market, we don’t find the combination of a strong external shock to energy prices exacerbated by internal factors.” and it leaves us with inflation which is the new normal, “he said.
“People can be confident that we will take action to make sure that doesn’t happen.”
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