The pound has fallen to its lowest level against the dollar since the start of the Covid pandemic amid growing concerns about the strength of the British economy.
Sterling fell more than a cent against the dollar to trade below $ 1.20 in foreign exchange markets for the first time since March 2020 as City traders reacted to mixed labor market figures and the prospect of a new referendum on the independence of Scotland.
The currency also lost ground as the dollar strengthened to a new two-decade high in anticipation of the US Federal Reserve raising interest rates on Wednesday to deal with rising inflation, possibly as much as 0.75 percentage points. The Fed last raised interest rates by this amount in 1994.
Against the euro, the pound fell more than 1% to about 86.81 pence, its lowest level since May last year.
Analysts say the sterling is under pressure from the stronger dollar after unexpectedly high US inflation data boosted expectations of a more aggressive interest rate hike from the US Federal Reserve. With the UK forecast to fall close to the bottom of global growth charts next year, the Bank of England may be forced to take a more cautious approach to setting interest rates on Thursday, although inflation has risen to its highest level since early 80s of last century.
Threadneedle Street is expected to raise interest rates by 0.25 percentage points on Thursday, raising its base rate to 1.25%.
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The latest decline in the currency comes after unemployment in the UK unexpectedly rose to 3.8% in the three months to April, from 3.7% in March. City economists forecast a decline of 3.6%.
Against the backdrop of negative developments in the strength of the pound, analysts said Nicolas Sturgeon’s announcement on Tuesday that a new referendum on Scottish independence was being prepared was also affecting the currency. Scotland’s first minister said on Tuesday that he would inform Holyrood of his plans “very soon indeed”.
Simon Harvey of the financial trading company Monex Europe told Reuters: “If he had to isolate the movement lower to one event, I would probably say that the risk to Scottish independence was the drop that broke the camel’s back.
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