Pound slumps to lowest level against dollar this year

·3 min read
Pound slumps to lowest level against dollar this year
Sterling fell to as low as $1.3364, trading below a key $1.34 support level. It marked its weakest point since December last year, when fears of a no-deal Brexit flooded the market. Photo: Dinendra Haria/SOPA Images/LightRocket via Getty

The pound hit its lowest level of 2021 against the dollar (GBPUSD=X) on Thursday after the UK economy grew at a slower pace than expected in the last quarter.

Sterling fell to as low as $1.3364, trading below a key $1.34 support level. It marked its weakest point since December last year, when fears of a no-deal Brexit flooded the market.

According to data from the Office for National Statistics (ONS), the UK economy grew 1.3% in the three months to the end of September, trailing behind forecasts of 1.5%. It was also a dramatic slowdown from the second quarter, when GDP rose 5.5%

Goods and labour shortages were the biggest drag on growth amid the struggle to keep up with the sharp rebound in demand. 

However, the biggest drivers were from hospitality, arts and recreation, and health following the further easing of restrictions and reopening of the economy.

The pound fell below $1.34 on the day. Chart: Yahoo Finance
The pound fell below $1.34 on Thursday. Chart: Yahoo Finance

It comes as the pound had already tumbled last week due to the Bank of England (BoE) surprising traders by leaving interest rates unchanged at record lows of 0.1%.

The Monetary Policy Committee (MPC) voted by a majority of 7-2 to maintain the Bank rate as it is. Markets had priced in a 15 basis point rise in rates, but the MPC defied expectations.

By contrast, the dollar has been boosted by expectations that the Federal Reserve will increase interest rates faster than expected after US inflation surged to a 31-year high.

On Wednesday, US inflation jumped to an annual rate of 6.2% last month, higher than the 5.8% forecasted by economists.

This meant US inflation stood at the highest annual rate since November 1990. Excluding food and energy, which tend to be volatile, inflation was 4.6%.

Read more: US markets fall as inflation rises to highest annual rate in three decades

“The UK’s growth figures are adding to existing selling pressure on the pound, which slumped to session lows, extending yesterday’s sharp drop against the US dollar as its downward trendline continues,” Victoria Scholar, head of investment at Interactive Investor, said.

“The pound has been trading in a descending trendline since the highs in May, retracing around a third of its gains since the pandemic-induced trough in March 2020.”

Others have warned that the pound's decline could deepen further before the end of the year.

Alex Kuptsikevich at FxPro said: “GBP/USD has formed a downtrend since June on signals of a quantitative easing rollback from the Fed, and in November, the pair fell to the lower boundary of this downtrend channel.

“A consolidation below 1.3350 would indicate an acceleration in the pound’s decline against the Dollar, potentially sending it to 1.30 by the end of the year.”

Watch: What is inflation and why is it important?

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