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The British currency sank to its weakest level against the US dollar since 1985 on Friday, after the Bank of England warned that little could be done to stop a recession in the country.
Sterling plummeted to as low as $1.135 at the start of Friday trading in London, before rising slightly to $1.1378. It was also trading 0.5% lower against the euro at €1.1407.
“The grinding backdrop of everything that’s going on is weighing on sterling, with the UK running these massive external deficits and the risks around the new prime minister’s policies adding to that,” the head of currency strategy at Saxo Bank, John Hardy, told Reuters.
Economists say that the drop was also triggered by the publication of figures by the Office for National Statistics (ONS), showing a 1.6% drop in August retail sales. The agency explained that “rising prices and cost of living” were affecting sales volumes.
The figures indicate “that the downward momentum is gathering speed,” Olivia Cross, an economist at Capital Economics, told the Financial Times, adding that “the economy is already in recession.” She predicted that retail sales would “probably continue to struggle as the cost-of-living crisis hits harder in the coming months.”
The Bank of England earlier projected that the UK economy will enter a recession in the fourth quarter of this year. The contraction is expected to last for the following five quarters, before the country enters a period of stagnant to weak growth in the medium term to 2025.