Sterling fell to its lowest level since 1985 against the dollar on Friday after a round of weaker-than-expected UK retail sales data amplified concerns that the country was headed for recession prolonged
The pound fell as much as 1 percent to $1.135, the first time it has breached the $1.14 mark in nearly four decades, before recovering to around $1.142 in New York trading on the day .
The sharp drop in the currency reflects a broad and powerful rally in the dollar this year, as well as particular concerns about the UK economy. Sterling fell 0.5 percent against the euro on Friday to 1.141 euros, its weakest level since early 2021.
Retail sales fell sharply in August as UK consumers struggled with rising prices and high energy costs, according to data released by the Office for National Statistics on Friday. The amount of goods bought in the UK fell by 1.6 per cent between July and August, reversing a small expansion in the previous month.
That was a bigger drop than the 0.5% contraction forecast by economists polled by Reuters and the biggest drop since July 2021, when Covid-19 hospitality restrictions were lifted.
Olivia Cross, an economist at Capital Economics, said the figures suggested “that downward momentum is accelerating” and supported her view that “the economy is already in recession”.
The ONS said rising prices and cost-of-living pressures were weighing on sales volumes, which have continued on a downward trend since summer 2021, following the reopening of the economy after pandemic lockdowns.
The figures highlighted how high inflation has affected consumers and the wider economy. The £150bn energy support package announced this month is expected to limit the blow from the recent rise in gas prices, but did not dispel the risk of a recession.
Victoria Scholar, head of investments at Interactive Investor, said the fact that sterling fell against the dollar and euro on Friday showed that “it’s not a dollar movement . . . but it’s actually the traders who are selling the pound amid negative sentiment towards the UK’s economic outlook and investment case”.
Bank of England data also shows that sterling’s effective exchange rate, a measure weighted to take into account its competitiveness vis-à-vis major trading partners, has fallen by 6.5 per cent since the start of ‘year. The gauge is still above the all-time lows it hit in 2020 and 2016.
The BoE is expected to raise interest rates for the seventh time in a row at its meeting next week as it deals with an inflation rate almost five times higher than its 2% target.
However, the weak retail sales figures could guide the BoE towards a 0.5 percentage point rate hike when policymakers meet next week, rather than the 0.75 percentage point increase that some expected, said Gabriella Dickens, senior UK economist at Pantheon Macroeconomics.
The US Federal Reserve is expected to raise rates by at least 0.75 percentage points next week and a smaller BoE rate hike could further reduce the appeal of holding the pound.
In a sign of the UK economy’s struggles, the amount of goods bought by consumers almost fell to pre-pandemic levels from a peak of almost 10 percent above April 2021 .
All major sectors fell over the course of the month, but non-food retail was the main driver. This is due to large sales declines at department stores, down 2.7%, home goods stores, down 1.1% and clothing stores, down 0.6%.
Notable declines in sports equipment, furniture and lighting gave “an indication of the types of items that consumers place at the bottom of their priority list in difficult times,” said Sophie Lund-Yates, an analyst at the financial services company Hargreaves Lansdown.
Online sales also fell sharply, down 2.6 percent, with food the third largest component of the monthly decline.
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While food sales were particularly affected by the reopening of the hospitality sector, the ONS reported that “in recent months, retailers have highlighted that they are seeing a decline in volumes sold due to rising food prices and cost of living impacts.”
Fuel sales also fell 1.7 percent and were 9 percent below their pre-pandemic levels, reflecting the impact of higher pump prices on car travel despite August prices were down compared to the previous month.
Lynda Petherick, head of retail at consultancy Accenture, said that “with a difficult winter ahead, retailers will be concerned that shoppers have already reduced their spending despite the hot summer”.