Pound Sterling plunges to a 37-year low of $1,135 on recession warnings

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Vrasidas Neofytou
Head of Investment Research

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Pound Sterling plunges to a 37-year low of $1,135 on recession warnings
The pro-cyclical Pound Sterling hit a fresh 37-year low of $1,135 to a dollar on Friday morning as investors fear that the disappointing UK retail sales, the stronger dollar, and the record-high inflation figures could push the British economy into a prolonged recession.

GBP/USD pair, Daily chart

The GBP/USD pair fell as low as $1,135 for the first time since 1985 after the publication of figures showing a 1.6% fall in August UK Retail Sales, indicating a deterioration of the consumption picture in the local economy.

Sterling extended losses falling below the $1,16 level at the beginning of this week following the official announcement on Monday that the British economy grew by only 0,2% month-on-month in July vs market expectations for a 0,4% expansion.

The British economy has been hit hard by skyrocketing energy and food prices driven by the Ukrainian war, lifting the U.K. Consumer Price Index- annual inflation figure to the four-decade high of 10,1% in July, before slightly cooling at 9,9% in August, which increases the cost-of-living for the local population.

The Pound Sterling continues the recent downtrend momentum despite the fresh £130 billion in value emergency fiscal package announced by the new British Prime Minister Liz Truss last week, in a positive step to limit inflation and reduce the immediate risk of recession.

Truss’s new fiscal package involves the capping of annual household energy bills at £2,500 ($2,881.90) for the next two years, with an equivalent guarantee for businesses over the next six months and further support in the pipeline for vulnerable sectors, to sharply reduce the energy costs and support the real income during the winter.

Yet, the announcement hasn’t been cheered by investors, as the new U.K government is expected to fund the difference arising from the price cap through borrowing and public debt issuance, rather than a windfall tax on energy companies proposed by opposition parties.

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