Why is the pound falling against the dollar? Recession predicted for struggling UK economy

Bank of England interest rate increased discussed by Halligan

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Sterling was down 0.6 percent at $1.2660 at 2.30pm UK time, after falling to its lowest versus the dollar since July 2020. The dip comes at a time of stark economic hardship for the UK and global fears that supply chains could be disrupted once again.

The pound also fell to a three-week low against the safe-haven Japanese yen, down 1.3 percent to 161, and to a 13-day low against the Swiss Franc dropping 0.7 percent to 1.2125.

Elsewhere, the Euro hit a five-year dip, trading as low as $1.0588 on Wednesday.

The US dollar is doing considerably better than European countries, climbing 4.3 percent higher in April and is on course for its best month since January 2015.

The jump is propelled by mounting expectations for the Federal Reserve to hike interest rates aggressively in the coming months, and for the US economy to stand up stronger than the eurozone.

Why is the pound falling?

The growing signs of a weak economic outlook at home and abroad are hurting the currency.

Data released on Tuesday by the Government showed borrowing in the 2021/22 financial year was nearly 20 percent higher than forecast by the budget office in March.

Analysts have warned fears of a recession and a slowdown in the jobs market may encourage the central bank to pace its monetary tightening plans.

On Tuesday, economists at Deutsche Bank yesterday warned the UK is at risk of going into a recession as the cost of living obliterates spending.

The bank warned UK inflation is likely to hit nine percent in October, which will dramatically hit spending power for Brits.

What’s more, real wages are forecast to shrink by four percent in 2022.

If true, this would amount to one of the worst real-term cuts to pay packets since the Second World War.

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Jeremy Boulton, a market analyst at Reuters, said: “Currency traders are running for the hills.

“The Dollar is soaring as cash heads towards safe assets… previously in demand currencies have weakened substantially.”

Also causing fear among investors is the prospect of persistent COVID lockdowns in China could weigh heavily on economic activity and disrupt global supply chains.

Jim McCafferty, managing director for Asia-Pacific equity research at Nomura, said: “Once there’s a way back to normalcy out of these lockdowns, then potentially we could see a large stimulus that would allow for consumers to come back with a vengeance and that’s when we’ll see investors regain confidence.”

Matt Weller, Global Head of Research at FOREX.com, said: “Global fear toward Chinese assets is growing increasingly palpable.

”While there are multiple catalysts for the continued downtrend, including a crackdown on technology companies, a real estate slump, and general risk aversion from the ongoing Russia-Ukraine conflict, the biggest issue for traders right now is the ongoing outbreak of COVID in the country.”

As well as this, the news that Russia has cut gas supplies to Poland was unsurprisingly poorly received by markets this morning.

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