The pound fell against the dollar for the seventh straight day yesterday in its longest losing streak since the start of the pandemic.
As economic data reignited fears of a recession, sterling fell as much as half a cent to almost $1.28, after hitting a 15-month high of more than $1.31 earlier this month.
The latest drop came after closely watched figures from S&P Global showed growth in Britain’s private sector has slowed sharply to its weakest pace in six months.
Sterling falls to $1.28, after hitting a 15-month high of over $1.31 earlier this month.
The purchasing managers’ index (PMI) of business activity, where 50 is the borderline between expansion and contraction, fell to just 50.7.
It was the lowest reading since January and a sharp drop from June’s 52.8. Economists had expected a milder decline, to 52.4.
The reading puts pressure on the Bank of England, led by Governor Andrew Bailey (pictured), to slow the pace of interest rate hikes when officials meet next week.
Rates are now expected to rise just a quarter of a percentage point instead of seeing a repeat of June’s extraordinary half-point increase.
Sterling’s slide, the longest losing streak since March 2020, reflects diminishing expectations about how high rates will ultimately need to be to rein in inflation.
Rates have risen sharply, from 0.1% in December 2021 to 5% today, as the Bank of England struggles to control inflation.
Traders had expected them to break above 6 percent, but now markets are betting that they are more likely to top out around 5.75 percent.
Figures last week showed inflation had fallen more sharply than expected, from 8.7% to 7.9% in June.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the PMI data strengthened the case for the Bank to raise rates again by a quarter of a percentage point “instead of triggering” a half-point hike.
Britain has avoided a recession this year despite the lower cost of living.
But the slowdown in business activity this month suggests higher interest rates are hurting. “Data for July highlighted a sizeable slowdown in the growth of business activity in the UK private sector economy,” said the S&P Global PMI report.
Thomas Pugh, economist at RSM UK, said it “suggests the economy is starting to buckle under the weight of rising interest rates and exceptionally high inflation.”
He added: “Momentum and resilience in the private sector is beginning to falter, and it is not hard to see the economy slipping into recession in early 2024 as the impact of interest rate hikes continues to feed through to the real economy.”
The PMI figures showed that orders plateaued and backlogs fell sharply.
In the services sector, companies were affected by the slowdown in the real estate market and spending cuts by companies and consumers.
Across the private sector, expectations for next year softened as companies worried about the impact of higher borrowing costs on demand.
Meanwhile, the rate of inflation for prices charged by businesses fell to its lowest level in two and a half years, in what can be seen as a boost for the Bank of England.
The fall in the pound diminishes the purchasing power of holidaying British tourists. It has also lost ground against the euro. But it is still in a much better position than last fall when the British pound fell to less than $1.04 against the dollar.
THE EUROZONE IS IN REVERSE GEAR
A FASTER than expected drop in business activity across the eurozone has raised fears of a recession on the continent.
The Purchasing Managers’ Index (PMI) reading of 48.9 was an eight-month low, and down from June’s 49.9. Economists expected a drop to 49.7.
A reading that is below the 50 point mark indicates a contraction.
The decline was seen across the eurozone with reduced business activity in both Germany and France, the bloc’s largest economies.
It will raise questions for the European Central Bank, which is due to announce its latest rate decision on Thursday.
It has been raising interest rates to try to control inflation, and the latest data suggests that is starting to hit consumers.
Paolo Grignani of Oxford Economics said: “Today’s data suggests that the risk of a small contraction in eurozone GDP in the third quarter is rising.”
A separate PMI reading yesterday for the US, the world’s largest economy, noted that growth contracted at its weakest pace in five months.
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