The pound fell by more than a cent to its lowest level since March 2020 in the wake of U.S. inflation news.
Sterling plunged to below $1.20 on foreign exchange markets, as City traders anticipated a U.S. interest rate rise of up to 0.75%.
The currency was also weighed down by factors such as a possible prolonged leadership contest in the Conservative party, and a new Scottish independence referendum.
Foreign currencies hit hard
Matthew Ryan, head of market strategy at global financial services firm Ebury, said: “Sterling has struggled against the broadly stronger US dollar so far this week, as the heightened risk of a slowdown in the global economy weighs on risk assets worldwide.
“European currencies in general have been hit particularly hard, largely a consequence of diverging natural gas prices across the Atlantic.
“Yesterday’s bumper US inflation reading has also spooked markets, and caused investors to ramp up bets in favour of higher Federal Reserve interest rate.
“Futures now see a decent chance of a 100 basis point rate hike at the next FOMC meeting in late July. Political uncertainty is also beginning to contribute to a bit of an underperformance in the pound, as markets prepare for a prolonged Tory leadership contest.”
The UK is forecast to plunge to the bottom of global growth league tables next year – so the Bank of England could be forced to take a more cautious line on interest rates.