The pound sterling has reached a six-month low against the US dollar, with fears that high interest rates could push the UK into a recession. The pound has fallen by 3.4% against the dollar this month and by 7.2% since mid-July, as concerns grow that the current interest rates, the highest in 15 years, will stifle economic growth. A recession would decrease the likelihood of further rate increases, as the economy would already be contracting. This decline in sterling can be attributed to the UK’s significant drop in peak rate expectations compared to other major economies.
Last week, the Bank of England surprised the markets by keeping rates on hold after 14 consecutive increases. Market data suggests that there is now a 50% chance that there will be no further rate hikes from the current benchmark rate of 5.25%. Traders had previously anticipated UK rates rising to around 6.4% by the end of the year. The UK’s economy and inflation showed more resilience than expected earlier this year, leading investors to believe that interest rates would remain higher for longer than in other countries. However, the UK’s economic slowdown, indicated by lower than expected inflation figures for August and data revealing a rapidly slowing economy, has led to a change in market expectations.
Economists are now predicting further weakness for the pound, with some forecasting it could fall to $1.18 against the dollar before the end of the year. Currency traders are turning to the US dollar as a safe-haven currency amidst concerns over global growth. The pound has also weakened against the euro, with the euro strengthening by 1.6% against the pound this month to £0.869. Analysts believe that sterling’s decline against the euro is particularly concerning, as growth is slowing in both the UK and the eurozone. Hedge funds and other speculators have reduced their bullish positions on the pound, having initially bet on further aggressive Bank of England rate hikes.