Wed, December 07, 2022

Record Lows for The British Pound, how And Why?

close up shot of one british pound

On Monday, the dollar was flooded with safe-haven trades as worries about the deteriorating economic situation in Europe caused the British pound to hit a record low and the euro to reach a 22-year low.

The pound dropped as much as 5% to a record low of $1.0384 as concerns about the U.K.’s economic health increased in the wake of the nation’s announcement of significant tax cuts in the face of an impending recession. Last week, UK Chancellor Kwasi Kwarteng proposed the largest package of tax cuts to help the nation’s sluggish economic development in 50 years. However, given the nation’s declining economy and twin deficits, traders questioned if such a step would be sustainable.

Overall Economic Activity in The U.K.

According to data released on Friday, the U.K.’s commercial activity declined in September for the second consecutive month. Recently raising interest rates, the Bank of England also warned that the U.K. economy could already be in a downturn.

The euro fell 0.5% to $.09643, a record 22-year low. Investors priced in a potential recession in the Eurozone last week after a string of disappointing economic reports for the region. Concerns over a developing energy crisis and a possible escalation of the Russia-Ukraine conflict further hurt the currency’s reputation. This year, the largest obstacle to the economies of the U.K. and the Eurozone has been high inflation, which has caused both company and consumer expenditure to decline.

The dollar index reached a fresh 20-year high on Monday due to the euro’s and the pound’s weakness, with safe-haven purchasing continuing to support the dollar. This year, the reserve currency has seen a significant increase due to rising U.S. interest rates, which are expected to continue soon. The Federal Reserve also hinted that interest rates in the United States are expected to climb much further this year, possibly reaching a 16-year high of 4.4% by the end of 2022.

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