Pound Sterling at Lowest Level Against the U.S. Dollar Since 1985 Reinforces Impending Recession

On Wednesday, the British pound plunged to its lowest level against the dollar since 1985 as investors fled British assets in the face of a bleak economic outlook and a surging dollar.

The value of the British pound fell as low as $1.135, its lowest level in 37 years. The drop came after data showed a 1.6 percent drop in retail sales in August, which some experts say indicates a “deterioration in the U.K. consumer situation.“

Escalating inflation, currently at the highest level of any G-7 country, an impending recession, and concerns about tax cuts were the factors that pushed the pound downward as experts now believe that increased government spending under a new administration would exacerbate price pressures.

The pound has lost more than 15 percent of its value against the dollar since the beginning of the year, which poses additional problems for the Bank of England, as it increases the cost of imports and may cause higher imported inflation.

Due to concerns about economic growth, expectations of further rate hikes and continued volatility in energy markets, European stock markets were down on Friday.

All sectors were down, and the Stoxx 600 index for all of Europe fell 1 percent. Germany’s DAX was down 1.7 percent, the CAC 40 was down 1.8 percent, and Britain’s FTSE 100 was unchanged.

Speaking on the current state of the pound last week, Jan von Gerich, chief analyst at Nordea, said, “At the moment, the momentum is very negative. I would expect the moves to have been so violent that the Bank of England will not like it and may be more hawkish.“

“There could be a recovery in the pound, but I wouldn’t want to catch a falling knife just yet“, he added.

The biggest losers in trading, as European stocks fall, are German energy company Uniper and British company Royal Mail. Royal Mail fell 10 percent as postal workers prepared to stage two pay strikes over the next two weeks.

The last time the value of the pound fell to $1.14 was briefly in March 2020 and after the 2016 Brexit result. The $1.1407 level had not been seen since 1985, under Margaret Thatcher’s government.

Sterling hit an all-time low of $1.0545 in March 1985, shortly before the G7 countries adopted the infamous “Plaza Accord” to control the Reagan-era super dollar.