The British Pound struggles against the US Dollar

The Pound Sterling recently fell to its lowest levels against the US dollar since mid-2020 as economic issues loom large over the UK. With consumer spending likely to be constrained by the rising cost of living, and fears global supply chains face severe disruption once again, some financial experts are forecasting a recession on the horizon.

The pound has also dropped against safe-haven currencies such as the Japanese Yen and the Swiss Franc in recent weeks as the domestic outlook worsens. Business owners, financial analysts and forex traders will be keenly monitoring how the situation progresses in the coming weeks and months.

Below we look at the factors that have led us to this point and explain what significance a weaker pound holds for the average British citizen.

What’s caused the current situation?

How did we get here? Several factors are at play, contributing to recession fears and a slowdown in the jobs market.

There are clear signs Brits are or will soon cut spending in response to rising bills and costs for essentials such as fuel, energy and food. The Bank of England recently warned inflation is likely to hit around 10% later in the year, up from its previous prediction of around 7%, due in part to the ongoing Russian invasion of Ukraine.

With wages lagging behind, the inflation spike is not good news for businesses that had been buoyed by the return of consumer spending when domestic Covid restrictions eased. Persistent Covid lockdowns in China threaten further misery as global supply chains face ongoing disruption, likely leading to more wholesale price hikes which must either be absorbed or passed on to customers.

All these trends mean a sharp economic slowdown is on the cards for the final quarter of 2022. The prevailing gloom means investor confidence in the pound is unlikely to be restored any time soon.

What a weaker pound means for the British public

So what does a weaker domestic currency mean for a country’s residents? In short, it’s unlikely to be positive. Drops in currency value have potentially harmful implications across investing, jobs, inflation, savings and other areas.

Business owners will see their purchasing power reduced overseas, while imported goods will become more expensive for companies and end users. Inflation could increase further as a result, as the UK tends to import more than it exports.

People on fixed incomes, such as pensioners and those who haven’t enjoyed recent pay rises, will soon notice their money not going as far as it used to. This in effect makes them poorer, a point the Resolution Foundation recently highlighted when reporting that some 1.3 million extra people in the UK could soon face poverty.

It’s worth bearing in mind that the foreign exchange market ebbs and flows, and it can never be fully known what the future holds for individual currencies. But all signs are pointing towards tough times for the pound and the British public.