Pound falls to 37-year low against dollar as recession looms

·3-min read
The pound plummeted to a 37-year low against the dollar on Friday. Photo: Matt Cardy/Getty Images
The pound plummeted to a 37-year low against the dollar on Friday. Photo: Matt Cardy/Getty Images

The pound (GBPUSD=X) extended its losses on Friday after gloomy retail sales figures highlighted the grim economic outlook ahead of the Bank of England (BoE) meeting next week.

Sterling, which has been one of the worst performing major currencies this year, fell 0.8% to $1.137 against the dollar in the aftermath of the release — its lowest level since 1985.

The currency has declined 15% against the greenback so far this year, and lost further ground as it marks the 30th anniversary of Black Wednesday — when the UK crashed out of the Exchange Rate Mechanism in 1992.

It also fell against the euro (GBPEUR=X), down 0.5% to €1.14 in afternoon trade in London.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: "It’s Bleak Friday for the pound, amid worries the UK has hurtled into recession, as the cost of living crisis intensifies and confidence in the government’s ability to prompt an economic turnaround fades.

"It’s a chilling repeat of the dismal day, 30 years ago, when sterling faced another crisis and spectacularly crashed out of the European Exchange-Rate Mechanism.

"Three decades on, Black Wednesday has a new rival in the notoriety stakes for the pound. This time its decline is being sparked not just by a deteriorating UK economy, but a mighty dollar and the fearless approach by the Federal Reserve in hiking rates."

A smaller BoE interest rates rise could further dent the allure of holding the pound as the Federal Reserve is broadly expected to hike rates by at least 0.75 percentage points next week or even 100 basis points — potentially sparking another rally for the dollar.

Read more: UK retail sales slump as inflation and energy bills squeeze households

It comes as UK retail sales declined at the sharpest pace in eight months in August as consumers cut back on spending amid the cost of living crisis, with all categories declining for the first time since July 2021.

The quantity of goods sold in stores and online dropped by 1.6% from July, more than three times the 0.5% fall forecast by economists, according to the Office for National Statistics (ONS).

Friday's slump left sales 5.4% lower than a year earlier, highlighting the pressure on household budgets as as wages fail to keep pace with soaring energy bills and the fastest inflation in decades.

All main retail categories fell over the month, but non-food stores were the biggest driver, largely due to a 2.7% drop in department stores, 1.1% fall in household goods stores, and 0.6% decline in clothing stores.

Fuel sales dropped sharply, by 1.7%, and were 9% below their pre-pandemic levels, reflecting the impact of soaring prices at the pump despite costs slightly easing in August compared with July.

Watch: How does inflation affect interest rates?