The British pound suffered its worst month against the U.S. dollar for a year in September, and strategists show little optimism for the rest of the year, as growth expectations weaken once again.
Sterling fell 3.75% against the dollar through the month, logging a decline not seen since the end of last summer.
The pound also slid 1.26% against the euro last month, notching its weakest performance since December 2022.
Exchange rates have been impacted over the past two years by interest rate expectations, with higher rates generally making a currency more attractive for foreign investment.
The Bank of England paused its run of 14 consecutive rate hikes in September, keeping its key rate at 5.25% — a level that economists and market watchers were quick to suggest likely represented its peak.
This “re-evaluation of expectations” of the peak rate and the profile of short-term UK interest rates pushed the pound lower against the U.S. dollar.
There is likewise an expectation that the European Central Bank is done with rate hikes. but while the euro rate versus the pound has retreated from the highs spring, the currency pair remains relatively elevated reflecting the recent build-up of recessionary risks facing the U.K. economy.
The Bank of England is, amongst the G10 central banks, probably in the hardest position. They need to balance an increasingly weaker growth outlook with very sticky high inflation.
We think part of sterling’s weakness is less pricing for Bank of England going forward, I think part of it is this recognition of low growth and high inflation, and expectations are that sterling will weaken further from here.