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Pound sees biggest monthly fall against dollar since 2016

Pound coins plunge into water
The pound fell as the UK economy faces a bleak outlook for the rest of the year, with surging inflation and rising energy bills threatening to drive Britain into a recession. Photo: /Dado Ruvic/Reuters

The pound (GBPUSD=X) suffered its biggest monthly fall against the dollar since 2016 in August, as investors retreated to safe-haven assets in the face of a looming recession.

Sterling declined 4.5% against the US greenback, while it was also down almost 3% against the euro (GBPEUR=X).

It was the sharpest monthly fall since October 2016, in the aftermath of the Brexit referendum.

It comes as the UK economy faces a bleak outlook for the rest of the year, with surging inflation and rising energy bills threatening to drive Britain into a recession.

The pound extended its fall into the month of September, dropping to a two-and-a-half year low against the dollar of $1.1558 — its fifth straight day of declines. A fall below $1.1412 would take the pound to its weakest level since 1985.

On Thursday, the Resolution Foundation further highlighted the troubled state of the UK economy, warning that the UK faces the biggest squeeze in living standards for a century, wiping out all real pay growth since 2003.

The group added that the number of people living in absolute poverty is set to rise by 3 million, with relative child poverty projected to reach 33% in 2026-27 — its highest level since the peaks of the 1990s.

"Our economic prospects are not looking particularly good compared to the rest of the world," said Laura Lambie, senior investment director at Investec.

Read more: What is the cost of living and how you can manage yours

Meanwhile, Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said a "bleak winter" lies ahead.

“Grim forecasts about poverty spreading across the UK this winter highlight the deepening woes for the UK economy. With such a bleak winter ahead, the pound has been pummelled to fresh lows against the dollar, with sterling dipping below $1.16, to $1.157," she said.

“This latest drop has rounded off a torrid month for the pound which has fallen by more than 5% against the dollar in August.

“It’s partly because of the higher interest rate expectations in the US, while in the UK the Bank of England might be forced to slow down rate rises in the months to come, given that Britain faces the deepest living standards squeeze in a century."

Watch: How to save money on a low income