Sterling fell to its lowest level against the dollar since 1985 on Friday after a round of weaker-than-expected UK retail sales data fueled concerns that the country was headed for a prolonged recession.
The pound fell 0.8 percent in morning trade in London to $1.137, the first time it has breached the $1.14 mark in nearly four decades, according to Refinitiv data. The move reflects broad strength in the dollar as well as particular concerns about the state of Britain’s economy.
Sterling was about 0.4 percent against the euro at €1.142, the weakest level since early 2021.
Retail sales fell sharply in August as British consumers struggled with rising prices and high energy costs, according to data published 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 percent contraction predicted by economists polled by Reuters and the biggest drop since July 2021, when Covid-19 restrictions on hospitality were lifted.
Olivia Cross, economist at Capital Economics, said the figures indicated “that the downward momentum is accelerating” and supported her view that “the economy is already in recession”.
The ONS said that “rising prices and the cost of living” were affecting sales volumes, which had continued a downward trend since the summer of 2021, following the reopening of the economy after pandemic lockdowns.
The figures highlighted how high inflation has hit consumers and the wider economy. The government’s £150bn energy support package announced this month is expected to cushion the blow from the recent rise in gas prices, but it has not removed the risk of a recession.
Victoria Scholar, head of investment at Interactive Investor, said the fact that sterling fell against both the dollar and euro on Friday showed “this is not a dollar move. . . but in reality it is 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 the effective sterling exchange rate, a measure weighted to take into account its competitiveness against major trading partners, has fallen by 6.5 per cent since the start of the year. The gauge is still above the historic lows it hit in 2020 and 2016.
The BoE is expected to raise interest rates for the seventh consecutive time at its meeting next week as it faces an inflation rate nearly five times its 2 percent target.
However, the weak retail sales figures could send the BoE towards a 0.5 percentage point rate hike when policymakers meet next week, rather than a 0.75 percentage point increase that some had 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 dent the appeal of holding the pound.
In a sign of the struggle for the UK economy, the amount of goods bought by consumers was almost down to pre-pandemic levels from a peak of almost 10 per cent above in April 2021.
All major sectors fell over the month, but non-food retail was the biggest driver. This is due to large sales declines in department stores, down 2.7 percent, household goods stores, down 1.1 percent and clothing stores, down 0.6 percent.
Notable declines in sports equipment, furniture and lighting “gave an indication of the types of items that push consumers to the bottom of their priority list in difficult times”, said Sophie Lund-Yates, analyst at financial services company Hargreaves Lansdown.
Online sales also fell sharply, down 2.6 percent, with food the third largest component of the monthly decline.
While food sales have been 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 sales volumes due to increased food prices and impact on the cost of living”.
Fuel sales also fell 1.7 percent, and were 9 percent below their pre-pandemic levels, reflecting the impact of rising prices at the pump on car trips despite some easing in August prices compared to the previous month.
Lynda Petherick, retail leader at consultancy Accenture, said that “with a difficult winter ahead, it will be a concern for retailers that shoppers have already reined in their spending despite the hot summer”.