The pound has suffered its longest stretch of daily falls since the start of the Covid-19 pandemic amid growing speculation in the currency markets that a weakening economy will limit further increases in UK interest rates.
With a new report released on Monday saying the UK economy almost stalled in July, sterling lost ground for a seventh day in a row against the US dollar – its worst run since March 2020.
The losing streak reflects the belief that the Bank of England will no longer need to raise official borrowing costs from 5% to more than 6% in order to tame inflation.
Threadneedle Street’s monetary policy committee meets next week, when it is expected to raise rates by 0.25 percentage points in its 14th consecutive increase since December 2021.
Higher interest rates tend to support currencies by offering investors a higher yield, but sentiment has turned against the pound in recent days, and in London trading it extended its fall against the dollar by a quarter of a cent to $1.281.
Prior to its seven days of falls, sterling had stood at $1.314 – its highest level in 15 months.
Fresh support for the notion that the Bank will not need to tighten policy as much as previously anticipated came from the purchasing managers’ index (PMI) – a monthly snapshot of the state of the private sector produced by S&P and the Chartered Institute of Procurement and Supply (CIPS).
The report showed output falling from 52.8 in June to 50.7 in July – a level only slightly above the cutoff mark of 50 that separates a growing economy from one that is contracting. Activity in the service sector slipped from 53.7 to 51.5 while the recessionary conditions facing manufacturing worsened with output falling from 48.1 to 46.5.
Despite signs that some firms were pushing up prices in response to higher wage bills, S&P/CIPS said inflation across the private sector had fallen for five of the past six months and stood at its lowest level in more than two years.
Chris Williamson, the chief business economist at S&P Global Market Intelligence, said: “The UK economy has come close to stalling in July which, combined with gloomy forward-looking indicators, reignites recession worries.
“July’s flash PMI survey data revealed a deepening manufacturing downturn accompanied by a further cooling of the recent resurgence of growth in the service sector.
“Rising interest rates and the higher cost of living appear to be taking an increased toll on households, dampening a post-pandemic rebound in spending on leisure activities.
“Meanwhile, manufacturers are cutting production in response to a worryingly severe downturn in orders, both from domestic and export markets.”
Samuel Tombs, a UK economist at Pantheon Macro, said: “The survey strengthens the case for the MPC to revert to raising Bank rate by 0.25 points at next month’s meeting, rather than unleash another 0.50 point hike.
“The increase in interest rates delivered to date appears to be increasingly slowing the economy; the composite index fell to its lowest level since January, and to a level consistent with GDP merely holding steady.”
The PMI for the eurozone showed a similar picture to that in the UK, with a fall in activity across the combined manufacturing sectors falling from 49.9 in June to 48.9 in July pointing to a continuation of the recession in the 19 countries using the single currency.
