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Sterling hit its lowest level on record last night

Jake Cordell
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It's bad news for holidaymakers as the pound hits a new record low (Source: Getty)

The pound fell to its lowest ever level during yesterday afternoon's brutal sell-off as the currency remains under intense pressure.

Sterling, which has been suffering at the hands of nervy traders keeping both eyes on every utterance from Prime Minister Theresa May, hit its weakest mark on the Bank of England's "effective exchange rate index" yesterday since the Old Lady began crunching the numbers in 1990.

The effective exchange rate measures the value of the pound against every currency in the world on a trade-weighted basis, meaning movements against our key trading partners matter more. The measure is used by the Bank to make forecasts on the performance of the UK economy and judge the outlook for inflation. Thus, it plays an important role in the monetary policy committee (MPC)'s thinking on interest rates.

In its latest batch of forecasts, published in the beginning of August, the Bank expected the sterling effective exchange rate to be at 79 this year and in 2017, which would result in inflation surpassing the Bank's two per cent target within the next 10 months.

However, the index hit 73.3 last night as American traders dumped the pound sending it down two per cent against the dollar in a matter of four hours. That reading is below previous record lows touched during the financial crisis of 2008 and after Black Wednesday when the UK was dumped out of the Exchange Rate Mechanism (ERM) in 1992.

A weaker pound also means inflation is likely to be higher than the Bank suggested as imported goods, such as food and fuel will cost more. For instance, in sterling terms, oil prices are up nearly two-thirds from their nadir, compared to just a 40 per cent jump when measured in US dollars.

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The trade-weighted exchange rate has now dropped 18 per cent since the 23 June - in line with consensus estimates that predicted the pound would shed around 20 per cent if the UK voted to leave the EU.

Sterling has recovered a touch this morning, but is still reeling in the wake of last week's flash crash and the fallout from the Conservative party conference over the prospect of a hard Brexit and the timing of Article 50.

The pound is up 1.2 per cent against the dollar today at $1.2273 and 1.4 per cent against the euro at €1.1124.