London Daily

Focus on the big picture.
Saturday, May 31, 2025

Blast from the past as currency speculators circle weakened pound

Blast from the past as currency speculators circle weakened pound

Analysis: Experts warn that sharp losses for sterling could drive up cost of imports and invite attacks on the currency

The judgment of the markets was swift and brutal. Currency traders took one look at what the Bank of England was predicting for the UK economy and launched a sustained attack on the pound.

It was noon last Thursday when Threadneedle Street announced it was expecting that a 40-year high of more than 10% for the annual inflation rate would coincide with a shrinking economy.

Bank governor Andrew Bailey told a press conference he wasn’t keen on the term stagflation – considering it imprecise. But the parallels with the 1970s were precise enough to trigger sharp losses for sterling. By the end of the day in London, the pound had lost two and a half cents against the US dollar.

By UK standards, what has happened in the past few weeks qualifies as a wobble rather than a full-blown crisis of the sort that forced sterling off the Gold Standard in 1931 or out of the European Exchange Rate Mechanism by speculators led by George Soros on Black Wednesday 30 years ago this year.

Nor was the sell-off as serious as that seen in 1976, the crisis that persuaded the then Labour government to ask for financial support from the International Monetary Fund. For the pound’s current weakness to become as legendary as 1931, 1976, 1992 or the postwar devaluations of 1949 and 1967, it would have to fall from today’s level of about $1.23 against the US dollar to parity, where £1 buys $1.

Even so, sterling’s weakness has implications. Stephen King, senior economic adviser at HSBC, thinks there is a risk of a feedback loop whereby the fall in the value of sterling adds to inflationary pressure by making imports dearer, and the evidence of higher inflation then leads to a renewed drop in the value of the pound.

Sterling, King says, is in the sights of the “vigilantes” – investors who look around the world for the weakest currencies and then attack them.


Part of the recent fall in the value of the pound has been due to the strength of the dollar, which always tends to attract support in times of trouble. Since the start of the year, the reasons to be nervous have mounted: the impact of the Omicron strain, China’s zero-tolerance approach to Covid-19 and the war in Ukraine.

Ominously, though, in recent weeks the pound has been weak not just against the US dollar but against the euro and other currencies such as the Australian dollar.

Nick Parsons, head of research at the impact investment firm ThomasLloyd, said: “The UK is set for the slowest growth in the G7. It is going to have the highest inflation in the G7. It has the greatest political uncertainty. That’s a pretty unpleasant combination.”

The recent sell-off in sterling came despite the Bank of England’s monetary policy committee raising interest rates at a fourth successive meeting. Traditionally, dearer borrowing costs make a currency more attractive to investors, but that was not true this time.

The reason was simple. Financial markets had been expecting interest rates to be raised to 2.5% by this time next year, but the threat of recession meant the Bank pushed back against that idea. With markets not entirely clear whether the MPC is more worried about growth or inflation, sterling is now lower than it was before rates were first raised late last year.

Gerard Lyons, chief economic strategist at Netwealth and one of Bailey’s rivals to be Bank governor, says: “At this rate a self-made sterling crisis could be next. Having wrongly eased aggressively when growth was recovering and inflation was rising last year, the Bank now continues to hike as it forecasts a sharp slowdown and likely recession ahead.”

A lower pound has its consolations. It will attract American tourists back to the UK and make UK exports more competitive on global markets. Conversely, imports and foreign holidays will be more expensive.

Parsons says any short-term boost to the pound is likely to prove temporary. “What would lead to a sterling rally? Aggressive rate hikes from the Bank of England? That’s not going to happen. Faster economic growth? You can rule that out. A big increase in exports? Dream on.”

Newsletter

Related Articles

0:00
0:00
Close
Satirical Sketch Sparks Political Spouse Feud in South Korea
Indonesia Quarry Collapse Leaves Multiple Dead and Missing
South Korean Election Video Pulled Amid Misogyny Outcry
Asian Economies Shift Away from US Dollar Amid Trade Tensions
Netflix Investigates Allegations of On-Set Mistreatment in K-Drama Production
US Defence Chief Reaffirms Strong Ties with Singapore Amid Regional Tensions
Vietnam Faces Strategic Dilemma Over China's Mekong River Projects
Malaysia's First AI Preacher Sparks Debate on Islamic Principles
White House Press Secretary Criticizes Harvard Funding, Advocates for Vocational Training
France to Implement Nationwide Smoking Ban in Outdoor Spaces Frequented by Children
Meta and Anduril Collaborate on AI-Driven Military Augmented Reality Systems
Russia's Fossil Fuel Revenues Approach €900 Billion Since Ukraine Invasion
U.S. Justice Department Reduces American Bar Association's Role in Judicial Nominations
U.S. Department of Energy Unveils 'Doudna' Supercomputer to Advance AI Research
U.S. SEC Dismisses Lawsuit Against Binance Amid Regulatory Shift
Alcohol Industry Faces Increased Scrutiny Amid Health Concerns
Italy Faces Population Decline Amid Youth Emigration
U.S. Goods Imports Plunge Nearly 20% Amid Tariff Disruptions
OpenAI Faces Competition from Cheaper AI Rivals
Foreign Tax Provision in U.S. Budget Bill Alarms Investors
Trump Accuses China of Violating Trade Agreement
Gerry Adams Wins Libel Case Against BBC
Russia Accuses Serbia of Supplying Arms to Ukraine
EU Central Bank Pushes to Replace US Dollar with Euro as World’s Main Currency
Chinese Woman Dies After Being Forced to Visit Bank Despite Critical Illness
President Trump Grants Full Pardons to Reality TV Stars Todd and Julie Chrisley
Texas Enacts App Store Accountability Act Mandating Age Verification
U.S. Health Secretary Ends Select COVID-19 Vaccine Recommendations
Vatican Calls for Sustainable Tourism in 2025 Message
Trump Warns Putin Is 'Playing with Fire' Amid Escalating Ukraine Conflict
India and Pakistan Engage Trump-Linked Lobbyists to Influence U.S. Policy
U.S. Halts New Student Visa Interviews Amid Enhanced Security Measures
Trump Administration Cancels $100 Million in Federal Contracts with Harvard
SpaceX Starship Test Flight Ends in Failure, Mars Mission Timeline Uncertain
King Charles Affirms Canadian Sovereignty Amid U.S. Statehood Pressure
Trump Threatens 25% Tariff on iPhones Amid Dispute with Apple CEO
Putin's Helicopter Reportedly Targeted by Ukrainian Drones
Liverpool Car Ramming Incident Leaves Multiple Injured
Australia Faces Immigration Debate Following Labor Party Victory
Iranian Revolutionary Guard Founder Warns Against Trusting Regime in Nuclear Talks
Macron Dismisses Viral Video of Wife's Gesture as Playful Banter
Cleveland Clinic Study Questions Effectiveness of Recent Flu Vaccine
Netanyahu Accuses Starmer of Siding with Hamas
Junior Doctors Threaten Strike Over 4% Pay Offer
Labour MPs Urge Chancellor to Tax Wealthy Over Cutting Welfare
Publication of UK Child Poverty Strategy Delayed Until Autumn
France Detains UK Fishing Vessel Amid Post-Brexit Tensions
Calls Grow to Resume Syrian Asylum Claims in UK
Nigel Farage Pledges to Reinstate Winter Fuel Payments
Boris and Carrie Johnson Welcome Daughter Poppy
×