Sterling pound banknotes and coins displayed on a table in London, U.K., April 22, 2022. (AFP Photo)
Ns News Online Desk: The British pound lost value against the U.S. dollar Wednesday after data indicated inflation has risen to a four-decade record, which raises concerns about the United Kingdom entering a recession given the loss of consumers’ purchasing power, the worst since the 1950s.
At 3:05 p.m. GMT, the sterling was down 0.7% at $1.24225, having fallen as much as 1% in morning trading. It had also overnight, before the data, briefly touched an almost two-week high at around $1.25.
The drop reverses most of the gains made Tuesday when strong labor market data had boosted expectations that the Bank of England (BoE) would have to further increase interest rates.
But the latest inflation numbers fueled fears that the threat of recession may temper how far the central bank can go, having delivered four rate hikes since December.
“Yesterday it looked like with wage growth rising and unemployment so low it meant that the bank had more room for maneuver,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
“Now the eye-wateringly high costs for consumers is going to lead to dropping consumer spending power, which will have a deep impact on output in the U.K. economy,” she said.
Against the euro, the pound was also down around 0.2% at 84.67 pence.
Consumer price inflation hit 9% in April, making Britain’s inflation rate the highest of Europe’s five biggest economies and almost certainly of the G-7 countries, with Canada and Japan yet to report figures for April. Neither are likely to match Britain’s price growth.
“Of course, the bank doesn’t want to be so aggressive that it pushes the U.K. into a deep downturn, but it knows it needs to pull some levers to try to keep a lid on inflation,” said Streeter.
Soaring energy bills were the biggest inflation driver last month, and British households are now facing the biggest cost-of-living squeeze since records began in the 1950s.
“The market is repricing growth expectations in the U.K., and by extension, reconsidering how far and doubting in a way whether the BoE will continue hiking at this pace,” said Francesco Pesole, FX strategist at ING Bank.
The outlook for aggressive rate hikes from the U.S. Federal Reserve (Fed) has also made the dollar more attractive, further adding to the pound’s weakness.
“Downside risks are unlikely to fade or evaporate in the coming months, and for the upside potential, especially with the Fed tightening and the U.S. economy doing very well, a move in cable close to the $1.30 level should prove pretty tough to sustain,” said ING’s Pesole.
Pesole said that concerns around the threat of a potential trade war between the European Union and Britain, following signals from the U.K. government on Tuesday of impending changes to parts of the Northern Ireland protocol, also suggested downside risks for the sterling.