Pound to Dollar Rate Drops to One-month Low

Pound to Dollar Rate Drops to One-month Low

The pound skidded to a one-month low against the dollar on Monday after a global sell-off was triggered by China’s struggling Evergrande – the nation’s second-largest property developer – denting risk-related currencies. This was compounded by uncertainties surrounding the Bank of England’s (BoE) monetary policy and surging gas prices. The UK government could offer state-backed loans to energy firms after wholesale gas prices skyrocketed, prompting large suppliers to request support to swallow the cost of taking on customers from companies that have gone under.

Investors don’t like uncertainty, so a lack of clarity around the BoE’s stance on monetary policy ahead of its meeting on Thursday is not welcome. The market had anticipated a relatively hawkish tone from the BoE; however, risks to the economic recovery have been escalating recently. Central bank officials who were considering voting for an early end to their fiscal stimulus programme – which was implemented to soften the blow dealt by the Covid-19 pandemic – could hold off for now, amid a slowing economy and surging inflation.

British public borrowing fell less sharply than forecast last month, posting its second-highest reading on record for August – underscoring the ongoing costs of the Covid-19 pandemic. Public Sector Net Borrowing (excluding state-controlled banks) totalled £20.5 billion last month, down £5.5 billion from a year earlier, data from the Office for National Statistics showed on Tuesday. Economists had on average forecast borrowing of £15.6 billion for the month.

Dollar benefits from safe-haven status

The dollar started the week on a firm footing with investors in a cautious mood ahead of a slew of central bank meetings, including the US Federal Reserve, while events in China added to markets’ fragility. Investors subsequently sought shelter in the safe-haven US currency, dragging the pound vs dollar rate below the 1.37 level for the first time since the end of August.

Looking ahead

A thin economic calendar on both sides of the pond means Housing Starts and Building Permits from the US housing market today are the first notable releases this week. Investors must wait until Thursday for significant data to be published from the UK economy when the Markit Services and Manufacturing PMIs hit the headlines.

The Fed concludes a two-day meeting tomorrow, with market analysts predicting that central bank policymakers will stick with broad plans for tapering this year – but don’t expect details or a timeline for at least a month.