Pound falls against the dollar over UK economy fears

Pound coins plunge into water in this illustration
The pound has had an extremely difficult first half this year, logging its worst half-year drop since 2016. Photo: Dado Ruvic/Reuters

The pound fell against the dollar (GBPUSD=X) on Friday as news of prime minister Boris Johnson’s resignation and fears of a looming recession, took their toll.

After recovering slightly on Thursday, the currency has since retreated and is hovering around $1.20 as traders waited to see who would emerge to succeed Boris Johnson.

The safe-haven US greenback continued to strengthen on the day, with the Bloomberg dollar index hitting a fresh two-year high in the morning as investors ditched riskier assets.

The pound shed 0.8% to $1.1931, just off its recent two-year lows. It is still trading near its lowest level since the COVID-19 pandemic.

Sterling has had an extremely difficult first half this year, logging its worst half-year drop since 2016.

There are further expectations for more downside in the second half of the year, particularly against the US dollar given this year’s strong safe haven demand.

"Johnson’s resignation does little to change the macroeconomic reality for the UK, where the toxic mix of rising household costs and slowing growth looks likely to test any future leader," said Tim Graf, head of EMEA macro strategy, at State Street.

"Sterling could be better supported in the coming days with the removal of near-term political uncertainty, but I would see rallies as opportunities to sell," he added.

Meanwhile, Neil Wilson, chief markets analyst at Markets.com said: “Sterling remains quite volatile. GBPUSD rallied again to 1.2050 overnight where it again met resistance and is pulling back to the 1.1950 area this morning.

“There ‘s lots of chatter around the UK political scene. Sterling is not cheering for Boris's resignation particularly — weak politics, weak economy, weak central bank remains the milking stool of currency weakness.”

Read more: Latest odds: Who will replace Boris Johnson as prime minister?

The euro also dropped 0.9% against the dollar (EURUSD=X) to $1.0072, leaving it hanging just above parity at a fresh 20-year low.

Analysts are predicting that the euro will slump to parity against the dollar in the coming days, with recession woes coupled by fears of cuts to Russian gas supplies.

On Friday Germany started an unofficial process of rationing energy amid gas cuts from Russia.

Economy minister Robert Habeck has placed Germany in the second phase of its three-stage emergency gas plan, warning: "We have to be prepared for the situation to become critical.”

Vonovia, the country’s largest residential landlord, said it would lower the temperature of its tenants’ gas central heating to 17 degrees between 11pm and 6am, according to the Financial Times.

Watch: Minister describes UK's shrinking economy as 'disappointing'