Sterling dropped from around $1.37 on Tuesday morning to a low of $1.35 on Tuesday evening. Tuesday’s fall was the sharpest drop against the dollar so far in 2021 and took sterling back to a level not seen since January 11.
Pressure eased slightly on Wednesday morning, with the pound up 0.1% to $1.3552. But cable remains at its lowest levels since the start of the year.
Analysts said that the sharp sell-off was driven by a combination of stagflation fears, the ongoing petrol crisis in the UK, and global concerns about the possibility of the US debt ceiling being breached.
“Sentiment has increasingly been knocked by the optics of the fuel crisis here,” Deutsche Bank strategist Jim Reid said on Wednesday. “Given this and the hawkish BoE last week many are now talking up the stagflation risk.”
The Bank of England last week upgraded its forecast for peak inflation and signaled interest rates were likely to rise faster than previously expected. Concerns are growing in the market that the Bank could be forced to raise rates to tame inflation at a time when growth is stagnant.
Fears have become more acute in recent days amid the ongoing petrol crisis in the UK. Some analysts believe the crisis could have knock on effects for UK growth.
“The fuel shortage is to some extent simply the vehicle through which the wider labour shortages are biting the most at the moment,” Deutsche Bank analysts Shreyas Gopal and Rohini Grover wrote in a bearish note on sterling sent to clients on Tuesday. “The risk is that this situation repeats itself with different products in the future.”
The bank this week advised its clients to sell sterling, saying: “We see the underlying backdrop as very negative for the pound.”
Analysts at Bank of America said they were skeptical of suggestions that the petrol crisis was weighing on sterling.
“Whilst we concede that rising domestic fuel prices are a headwind to the UK consumer, we do not think that recent developments are existential enough to weigh on GBP as it has done,” FX strategist Kamal Sharma wrote in a note. “More likely, we think that GBP has succumbed to month/quarter end rebalancing pressures as it has done in Q1 and Q2.”
Sterling hasn’t been helped by global concerns about the US debt ceiling being breached, which has prompted a global move to de-risk portfolios. US Senate Republicans have blocked attempts to raise the government debt ceiling. Treasury Secretary Janet Yellen warned on Tuesday that the US risked running out of money by 18 October unless the ceiling is raised.