Pound slumps to two-year low against dollar as fears for UK economy deepen

Sterling has fallen 11% against the US currency this year

Sterling’s fall against the dollar has also been driven by a US currency pumped up by hiked interest rates (PA Archive)

The pound has fallen to a two-year low against the dollar as fears grow for the future of Britain’s economy amid surging prices and falling consumer confidence.

On Tuesday, sterling fell below $1.19 for the first time since March 2020, when the government announced the first Covid lockdown.

It came as Boris Johnson's government lurched further into chaos following the resignation of senior figures including Rishi Sunak, the chancellor. In a parting shot at the prime minister, Mr Sunak said part of his reason for quitting was that the government needed to be honest that the path to a better future was “not an easy one”.

“The pound was already sliding before the UK government was plunged into chaos, yet the resignations of Rishi Sunak and Sajid Javid have simply added to the currency’s woes as it shows a cabinet in disarray,” said Russ Mould, investment director at AJ Bell.

“Recession fears have weighed on the pound in recent months and the currency has now hit a two-year low against the dollar as inflation continues to hurt consumers and businesses. Political chaos adds another layer of uncertainty on top of the recession fears, so it is no wonder the pound is sinking.”

Consumer price inflation hit 9.1 per cent in May and is expected to surge to 11 per cent later this year, meaning households face big falls in living standards as wages fail to keep up with rising costs for gas, electricity and food.

A weak pound will continue to push prices higher as the UK is dependent on imports for much of its energy and food.

Consumer confidence has hit its lowest level on record according to a long-running survey by Growth from Knowledge (GfK), while car sales fell to their lowest level for any June since 1996. The construction industry is also slowing down, new industry figures show.

The Bank of England said on Tuesday that the prospects for the UK economy had “deteriorated materially” since Russia invaded Ukraine.

Sterling’s fall against the dollar has also been driven by a strengthening of the US currency. The dollar has been buoyed by sharp rises to interest rates by the US central bank, which increase the returns that investors can expect.

The Federal Reserve hiked its main interest rate by 0.75 percentage points at its latest meeting in a bid to tame inflation.

The Bank of England has acted more cautiously, raising rates by 0.25 per cent last month to 1.25 per cent.

Policymakers have indicated that further hikes are on the way, with deputy governor Sir John Cunliffe saying on Wednesday that the Bank would do “whatever is necessary” to bring inflation under control.

While higher interest rates may help to reduce the upward pressure on prices, it will also cut into household budgets further by making borrowing more expensive.