The British pound is experiencing a sharp decline against the US dollar, reaching a six-month low and putting it on track for its worst month since last year. Concerns about high interest rates pushing the UK into a recession are driving this downturn. The pound has fallen 3.4% against the dollar this month and 7.2% since mid-July, as fears grow that the current interest rates, aimed at controlling inflation, will hinder economic growth. This decline in the pound can be attributed to the UK’s reduced peak rate expectations compared to other major economies, as well as the unexpected decision by the Bank of England to keep rates on hold after a series of consecutive increases.
This shift in sentiment marks a rapid change for traders, who had previously anticipated further rate increases in the UK. However, with lower than expected inflation figures for August and signs of a rapidly slowing economy, the likelihood of more rate hikes has diminished. As a result, markets now predict only a 50% chance of further rate increases. This change in expectations has led to a significant decline in the pound’s value against the dollar.
Economists are forecasting additional weakness for the pound, with some predicting a drop to $1.18 by the end of the year. Currency traders are turning to the US dollar as a safe haven amidst concerns of slowing global growth, causing the dollar to strengthen and further weigh on the pound. Additionally, the decline in the pound against the euro is seen as more worrying, particularly as growth falters in both the UK and the Eurozone. Hedge funds and currency speculators, who had previously held bullish positions on the pound, have been reducing those positions in response to the Bank of England’s decision to keep rates on hold.