Fears for the rapidly cooling British economy pushed sterling to a 21-month low against the dollar in trading yesterday, while investors also took signals of weaker growth across the eurozone to switch to the American currency.
The pound slumped to as low as $1.9146, its lowest since November 2006, and has fallen around 3 per cent in the last week alone. Only three weeks ago it was trading comfortably above the $2 mark.
Next week's Inflation Report from the Bank of England will give the most authoritative and up-to-date assessment of prospects for the British economy. Few expect other than a further downgrading of its growth forecast and an upward revision to its projections for inflation, widely expected to peak at over 5 per cent in September.
Analysts pointed also to some special factors behind the pound's switchback. David Bloom, head of foreign exchange strategy at HSBC, pointed to the $52bn that has been pumped into the British banking system through rights issues and other capital raising, mainly from dollar investors in China and the Gulf states. This activity artificially boosted the demand for sterling on forex markets, but "we're back to the fundamentals again now".
He pointed to weakness in the housing market, in producer prices and pros-pects for bank rate as driving trading patterns.