The pound has weakened to its lowest level in six months against both the dollar and the euro, pressured by fears of a no-deal Brexit and mounting signs of a slowing economy.
The latest evidence of economic trouble came from a survey showing that sales at British retailers inched up at the slowest pace on record over the past year. A number of economists believe the economy contracted in the second quarter.
Bank of England governor Mark Carney said that the chances of a no-deal Brexit were “uncomfortably high”.
International trade secretary Liam Fox put the odds at “certainly not much more than 60-40”.
The falls come despite a rise in UK interest rates, which usually pushes up the value of sterling.
Since the beginning of the month, the pound has fallen 1.7% against the dollar and 0.8% against the euro.
The pound fell to equal $1.25 and 1.11 euro, with both rates below earlier six-month lows. Against the dollar, sterling was within striking distance of an April 2017 low below $1.24. It very briefly hit that low in January this year in chaotic trading during a currency market flash crash.
“Some are thinking in the market that the Bank of England raised rates in order to give them ammunition to cut them in the face of a no-deal,” said Neil Jones, a foreign exchange expert at Mizuho Bank. “The next move by the central bank could be a cut rather than another hike.”
Nomura strategist Jordan Rochester added: “We remain bearish on the pound in the short term until the Brexit mess is out the way… “
A cheaper pound makes imports – and anything bought by foreign exchange, such as holidays – more expensive. It also makes the UK a less attractive place to work for foreign nationals.
But it makes UK exports more competitive. In the first three months of the year, the UK exported a record £87bn in goods to the rest of the world, following a year in which they hit an all-time annual high of £338.9bn.
Investors are focusing on a critical meeting in October between Prime Minister Theresa May and EU leaders to try to thrash out the terms of Britain’s withdrawal.
Without a deal, some economists believe the UK and its trading partners would suffer an economic downturn.
Sterling’s losses have been compounded by a strengthening dollar after receding expectations of an imminent interest rate cut in the US.
Adam Cole, a strategist at RBC Capital Markets, noted that betting markets were now pricing in a 95 per cent chance of Boris Johnson becoming prime minister. Some investors worry Mr Johnson will push Britain towards an abrupt departure from the EU.
The IMF has said economic growth across the 27 remaining EU states would fall by as much as 1.5% by 2030, and wipe out almost 4% of the UK’s GDP.
However, others claim the dangers of a no-deal have been overstated. Sir Bernard Jenkin MP said: “The civil service and the government are feeding industry – and the industry is feeding the government – with this diet of gloom and alarm and despondency.”
The head of foreign exchange strategy at CIBC, Jeremy Stretch, said: “If there’s no improvement in the negotiating strategy with the EU, we could see the pound going back to levels not seen since last autumn, around $1.28 – and if it falls through that, it could go lower still.
“And unless the economic data in the UK starts to validate the rise in interest rates, it’s hard to see the pound regaining any strength.”
There is likely to be more pain in store for the pound. Han Tan, market analyst at FXTM, said the currency might fall further “should the prospect of a no-deal Brexit ramp up meaningfully over the coming months”.
Official data on UK economic output in May, will provide more clarity on whether the economy shrank in the second quarter after a series of disappointing business surveys.