TERLING fell to its lowest level in more than two years today, as currency traders backed the dollar and ditched the pound.
The Federal Reserve is poised to raise interest rates tomorrow, with the Bank of England to do so on Thursday.
But there is growing confidence that the Fed will move more aggressively than the Bank, making the dollar and dollar-denominated assets more attractive.
The Fed is likely to raise interest rates by 0.75 basis points, while the Bank is expected to raise rates by only 0.25 more points, bringing rates to 1.25%.
By early afternoon today, the British pound fell to only 1.21 USD. That was $1.41 a year ago.
There is a feeling that the gap in interest rates between the UK and the US may only get wider in light of recent economic news.
US economists expect the Fed to raise rates sharply in June and July, then slightly lower in September, November and December.
It is difficult for banks to do so.
There are signs that the UK may be already in recession. GDP fell 0.3% in April, much worse than the 0.1% growth economists had predicted.
That worry has spilled over into the stock market. The FTSE is down just 10 points today at 7197. But it has lost more than 400 points – worth £110bn – in the last five trading sessions.
“All the discussion is about whether we are heading towards a recession and how bad it will be,” said Craig Erlam at Oanda. With the pace of tightening now being expected from central banks and some could see those pick up in the coming weeks and months, a soft landing has become extremely unlikely. and we could see that language soften on Wednesday.
The Bank of England follows the Fed on Thursday and the temptation must be building to speed up its tightening considering double-digit inflation by year-end. Markets now turn it into a 25 to 50 basis point coin and this morning’s labor market numbers don’t make the debate any easier, given higher unemployment and wage growth slow down. “