On Thursday, the British pound declined and briefly reached its weakest level below $1.18 which was last seen in March 2020 at the peak of the coronavirus pandemic. This was because another wave of risk aversion send traders scurrying to purchase US dollars and they dumped currencies they believe risky when the market outlook has become so uncertain.
The decline of sterling
Even though the Bank of England was one of the first major central banks to begin hiking interest rates, it does not seem to have benefitted the British currency. This is because Sterling has recorded a sharp decline since the beginning of the year.
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A sharp increase in the interest rates across the developed world has been quite unnerving for traders and they have turned towards the US dollar, which is regarded as a safe haven during times of economic uncertainty. It is primarily because of the liquidity of the greenback and the role it plays in the global economy.
Dollar gets support
The US inflation data released on Wednesday turned out to be higher than expectations, as inflation rose by 9.1% in June, as opposed to the 8.8% expected. This gave rise to bets of a possible 100 basis point increase in the interest rate by the US Federal Reserve in its meeting scheduled for the next week.
This ended up rattling investors even further and provided the US dollar with further support. Market analysts said that the dollar would continue to strengthen in the near term because of the possibility of even more monetary policy tightening from the Fed.
The outlook for the economy in the UK also has investors concerned. This is because of worries that inflation in Britain could turn out to be significantly higher, as compared to other regions, even as economic growth comes to a halt.
There was a 1.1% decline in the British pound, as it came down to $1.1761. This was a new low of 27 months after it had recorded one previously on Tuesday. Later, the currency was able to make a recovery and was trading at $1.1795 by 1515 GMT.
The pound had been doing much better against the euro in recent weeks, but it recorded a decline of 0.2%, which brought it to a level of 84.77 pence. There is currently a leadership race ongoing in Britain for choosing the next prime minister of the country to replace Boris Johnson.
The list of candidates was a long one, but it has now come down to five names on Thursday. The Conservative party lawmakers are going to schedule more voting rounds in the coming days to reduce this list and make their choice.
The pound was also under a shadow because of uncertainty regarding who will emerge as the new premier and the economic policies they will adopt. However, analysts have said that a weak euro and a strong dollar are more important for the British pound right now instead of the political uncertainty in the country.
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