The pound is on track for its worst month against the dollar since Liz Truss’ disastrous mini-budget as traders rein in bets on how high interest rates will go in the UK.
Having started the month around $1.2580, the pound has fallen 3.45 per cent to trade around $1.2160, putting it at its lowest level since mid-March.
The fall reflects markets significantly readjusting their expectations for how high rates will have to go. Higher interest rates tend to attract foreign investment, boosting the value of the domestic currency.
Earlier in the summer, markets did not think it unlikely that interest rates would have to hit six per cent in order to bring down stubborn inflation. This led the pound to strengthen, with it hitting a cycle high of over $1.31 in mid-July.
Since then, inflation has fallen faster than expected while rate-setters at the Bank of England have indicated that they would prefer interest rates to peak at a lower level, but remain their for longer.
Concerns over the health of the economy led the MPC to leave interest rates at 5.25 per cent last week and many economists now think the Bank will not hike rates any further. Some analysts suggest the economy is already in a recession.
The pound’s weakness also reflects the strength of the dollar, which has soared to its highest level so far this year after the Fed told markets that rate cuts are unlikely to come any time soon.
Steve Clayton, head of equity funds, Hargreaves Lansdown, said: “When the Bank of England paused its series of rate hikes, just as the Fed started talking more assertively about there being potentially further hikes and/or an extended period of higher rates, the relative value of sterling versus the dollar was impacted.”
ING’s Chris Turner said this meant the pound still had further to fall yet. “The ongoing strength of the dollar and the softening risk environment warn that little support can be expected before the $1.2000/2075 area,” he said.