The pound has dropped to a two-year low against the dollar, reflecting growing concerns from traders about a global recession as energy prices continue to rise.
But sterling is also weak as markets remain concerned about the future of Britain’s economic growth, analysts said. He said sterling could fall further after forecasting financial stability and rising inflation.
London shares gained some momentum on Wednesday after Tuesday’s fall.
The resignation of two senior government ministers on Tuesday evening, including former Chancellor Rishi Sunak, was not a significant factor in the pound’s fall, Rabobank head currency strategist Jane Foley told.
The pound fell below $1.19 on Tuesday for the first time since March 2020, when the first UK COVID lockdown was introduced.
A weaker pound means that imports such as food become more expensive, which drives up the price of petrol at the pumps. It also means that UK holidaymakers get less money for shopping abroad.
However, UK products and services that are sold overseas may become more attractively priced for overseas customers.
The pound-to-dollar rate was flat on Wednesday, while markets in London and Europe rose, with some analysts saying they were returning to lower levels. The FTSE 100 stock market in London, which fell nearly 3% on Tuesday, rose almost 1% in morning trading on Wednesday.
AJ Bell’s investment director Russ Mold said investors expect a planned corporation tax hike to be scrapped in 2023. It could also be that the stock is “oversold” on Tuesday, he said.
The dollar is underperforming because of rising US interest rates, and investors see it as a safe bet.
“Now many people are worried about recession – recession in the US, recession in Europe, and of course we’ve got our cost of living crisis here in the UK,” Ms Foley said.
“Sterling is still weak on its own, even though the Bank of England has hiked interest rates five times this cycle already, and the reason for that is that the market is very concerned about the growth outlook here in the UK,” she said.
