The pound slid as low as 1.144 against the dollar on Monday – its lowest level since March 2020 – ahead of the announcement of the new Prime Minister.
When, as widely expected, it was confirmed that Liz Truss had beaten Rishi Sunak in the race to 10 Downing Street, the UK currency managed to claw its way back into the 1.15 range.
Truss has promised tax cuts and a new energy plan within the week, which could present the Bank of England with the conditions needed for larger or faster interest rate hikes to tackle runaway inflation.
Investors will be mindful, however, that higher rate expectations won’t guarantee the pound support amid forecasts the UK economy is on the brink of a recession.
A survey published on Monday provided further evidence that the UK economy is heading into a recession amid the deepening cost-of-living crisis. Data company S&P Global revised down its composite Purchasing Managers’ Index (PMI) for the services and manufacturing sectors to 49.6 from a preliminary “flash” August reading of 50.9.
This marked the first time the PMI had fallen below the 50 benchmark that denotes contraction in output since February 2021 when a second wave of COVD-19 was in full swing.
The services PMI for last month was revised down to 50.9 from the flash reading of 52.5.
“Demand for consumer-facing services such as restaurants, hotels, travel and other recreational activities is collapsing under the weight of the cost-of-living crisis,” said Chris Williamson, S&P Global’s chief business economist.
Dollar maintains its upward trajectory
The dollar remained in demand at the start of a new week that kicked off with US markets closed for the Labour Day national holiday.
Expectations that the Federal Reserve will persevere with its aggressive policy tightening path continue to support the US currency, especially after the release of better-than-expected nonfarm payrolls data on Friday.
Markets have priced in a more than 50% chance that the US central bank will lift rates by 75 basis points at its September policy meeting.
The British Retail Consortium (BRC) like-for-like retail sales print hits the headlines overnight on Tuesday.
The ISM services PMI is published in the US on Tuesday and is expected to show activity in the sector posted a modest decline in August but remained in expansion territory.
Also slated for release in the US on Tuesday are the composite and services PMIs for August from S&P Global.