The sterling has fallen to a two-year low against the dollar as concerns about the US federal reserve sticking with hawkish rate hikes sent investors buying dollars.
Pounds currently trade at $1.176 on Tuesday, its weakest exchange rate against the dollar since March 2020. It is believed that the sterling is under pressure from a stronger dollar as interest rate hikes in the US among other factors are prompting traders to seek safety in the US currency.
Also, expectations of the UK’s inflation spiking to a new record high amid rising energy prices and the worsening economic outlook in the region have contributed to the slump of the sterling.
Despite the US federal reserve interest rates hike in combating historic inflation, the perceptions of analysts and investors are still suggestive of a further uptick in the fed rate. This is particularly disturbing for the UK as the region is faced with a situation of a trade-off between further raising interest rates in defending their currency and increasing the cost of borrowing – which has a dampening effect on economic growth.
A weak pound means the import of food and other items will become more expensive. Similarly, the soaring energy prices which is fueling inflation would be more depressing for the UK as it will further contract the purchasing power of the UK citizens. Currently, the average gas price in Europe is around 15 times the average price of the last ten years and analysts anticipate an extraordinarily high inflation rate of 18.6 percent for next year.
The pounds fell by as much as 1.9 percent from $1.2 last Friday suggesting that there is not enough evidence that the fed will make a significant pivot from its monetary policy stance.
Notwithstanding, the strong demand for the dollar has been the major reason the greenback has strengthened relative to other major currencies. Surprisingly, the dollar still has the potential to rise further as investors exiting positions in Europe and elsewhere are looking for a safe harbor in US-denominated assets – which, require dollars to buy.