It is exactly 30 years to the day since, on “Black Wednesday” in 1992, the British government had to withdraw from the so-called European exchange rate, a forerunner of the euro, against its will. Previously, investors, including George Soros, had speculated against the pound sterling with ever-increasing sums of money.
The Bank of England countered this and tried to support the currency with billions. In vain: in the end there was no choice but to devalue the pound. The currency lost a quarter of its value against the US dollar in the weeks that followed.
The monetary attack of that time has etched itself deeply into the national psyche of the British. And just on their anniversary, the pound is now experiencing another severe setback: On Friday, the British currency fell to its lowest level against the dollar since 1985.
A pound was US$1.1351 in morning trade. According to data providers Refinitiv, that was the first time in 37 years that the stock had fallen below $1.14. Sterling also weakened against the euro, losing around 0.4 percent. The value is just over 1.14 euros, the lowest level since the beginning of 2021.
“This is more than a strong dollar,” said Mohamed El-Erian, president of Queens’ College Cambridge and advisor to Allianz. Thanks to its status as a safe haven, the US currency has been rushing from one high to the next against numerous western currencies for weeks. But Great Britain is also plagued by a number of national difficulties.
“In the wake of weak retail sales, this also shows markets trying to price in the details of the UK government’s fiscal pact next week,” El-Erian said.
“It’s a bleak Friday for the pound on worries the UK is slipping into recession as the cost of living crisis deepens and confidence in the government’s ability to turn the economy around wanes,” confirmed Susannah Streeter, analyst at financial services provider Hargreaves Lansdown.
One of the immediate triggers for the slide was weak retail sales in August. The British reduced the volume of their purchases by 1.6 percent compared to the previous month – even if they spent more money on it because of the high inflation. Economists had expected an average minus of 0.5 percent.
The decline affects all areas, said the Office of National Statistics. Even online less was bought. The sharp reduction “reinforces our position that the economy is already in recession,” said Olivia Cross, economist at Capital Economics.
The economists at the Bank of England do not expect a rapid improvement either. According to their forecast, the recession will not start until the fourth quarter. However, they expect the negative development to last for 15 months.
The new government under Liz Truss is trying to counteract this. The Ministry of Finance should now focus exclusively on growth, Chancellor of the Exchequer Kwasi Kwarteng had sworn to the officials in his house at the beginning of the week. The goal is for the economy to grow by 2.5 percent annually in the future. The last time the economy grew at this level was before the financial crisis of 2008.
Details on the new strategy are planned for next Friday. Then Kwarteng wants to specify the financing of the already announced energy package as part of a mini-budget.
As one of its first acts, Truss has already announced a maximum price of £2,500 (€2,879) for electricity and gas for an average household. In addition, simplifications for companies that have not yet been detailed are to follow. Observers estimate the cost of these measures at £150 billion.
Financing is expected almost exclusively through higher debt. Truss has already strictly ruled out an additional special tax on the considerable profits of many energy companies.
In addition, both private and corporate tax burdens are to be reduced. It is already certain that the increase in social security contributions will be withdrawn. The planned increase in corporate income tax has also been cancelled.
Adding to an already difficult macroeconomic environment with all its uncertainties, given the announced policy shift, the pound is weighing on the prospect of a sizeable balance of payments deficit and the risks of what else the new PM may plan, said John Hardy, Saxobank’s currency strategist Reuters news agency.
The measures announced to cushion the impact of high energy and gas prices should reduce price increases in the short term and boost consumer confidence. However, many observers fear that they could have an inflationary effect in the medium term.
The central bank could therefore find itself forced to make more significant interest rate hikes than expected anyway. The currency watchdogs have postponed their meeting scheduled for last Thursday because of the national mourning for Queen Elizabeth II and will now only meet next week. The seventh rate hike in a row is expected.
The situation is unlikely to change for the time being. At least since Thursday’s announcement by the US courier service FedEx that it was withdrawing growth forecasts from three months ago, the markets have been in the mode of eliminating risks, said Jane Foley, currency strategist at Rabobank. “In a risk-off environment, sterling behaves like a worse euro.”
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