The British pound has hit a 37-year low as the UK economy sinks

CNN business

Britain’s pound fell to a 37-year low on Friday after new data showed shoppers are pulling back on spending as inflation squeezes household budgets, underscoring fears the economy is already shrinking.

The currency fell below $1.14, the lowest since 1985, after the Office for National Statistics said retail sales fell 1.6% month-on-month in August, the biggest decline since December 2021 and significantly worse than economists had expected.

“I think the UK is already in recession,” said Michael Hewson, chief market analyst at CMC Markets UK.

The pound has been hit by weak economic data, but also by a strong rise in the US dollar, a safe-haven investment that sees inflows in times of uncertainty. The greenback is now near its strongest level in nearly two decades against a basket of major currencies, boosted by expectations of a big rate hike by the Federal Reserve next week.

But the UK’s economic outlook means the pound is suffering more than most. It has lost more than 15% of its value against the dollar this year, compared to the euro’s 12% decline.

A plan by Prime Minister Liz Truss to subsidize energy bills for homes and businesses may ease the pain this winter, but it may not be enough to restore growth. The Bank of England predicted a permanent recession before announcing its plan.

Investors have also been unsettled by the government’s indications it will pay for its energy program, which could cost £150 billion ($171 billion), significantly increasing the UK’s national debt. Chancellor Kwasi Kwarteng is expected to give more details next Friday.

The UK generally imports more than it exports. This means a weaker pound raises the cost of fuel, food and other goods, making it even harder for the Bank of England to keep prices under control.

The central bank, which is due to make its final policy announcement on Thursday, has been In August, interest rates were aggressively raised in order to reduce the 9.9% inflation.

Now he faces a big dilemma: another big rise in borrowing costs could hit the economy even harder. The Fed’s failure to keep pace, however, could push the pound even lower.

Hewson said he now believes the pound will fall to $1.10 after breaking the $1.14 mark.