Prospect of interest rate cuts pushes sterling and the euro down as the greenback surges
Growing recession fears and expectations of interest rate cuts sent the pound tumbling to a two year low against the dollar yesterday.
Markets are now pricing in a 75 basis point cut in interest rates over the next 12 months, a sharp turnaround from just mid-June when they were pricing in a 75 basis point rise.
“Now that peak inflation is in sight people are looking beyond this to how deep the economic downturn is going to be. A technical recession in the second half of this year is almost certain,” said Jonathan Loynes of Capital Economics.
The pound has fallen eight per cent in the past month against the dollar, yesterday hitting $1.83, as markets price in the gloomy prospects. Sterling was also hit by poor mortgage lending figures, while the dollar was boosted by a lower than expected 0.5 per cent monthly drop in house prices and consumer confidence, up from 51.9 in July to 56.9 this month.
The euro also plummeted yesterday, hitting a six-month low against the dollar, after the closely watched Ifo Institute survey showed German business confidence was now at its lowest level for three years, sparking fears of a recession.
“We can trace the decline to the beginning of August and the first evidence that central banks in both the UK and Europe would have to entertain markets’ perception that interest rates would have to come down,” said Stephen Gallo, head of market analysis at Schneider FX.