The Labour leader Sir Keir Starmer failed to rule out any spending cuts as the pound continues to slump this week.
Sterling fell by a cent to $1.21 on Monday morning, having hit its lowest level since November 2023 last week.
Ole Hansen, head of commodity strategy at investment platform Saxo said the situation looks ‘increasingly dire’ for consumers as the Bank of England will struggle to support economic growth.
The weakening of the pound could mean consumers face price hikes in various sectors including fuel and food.
Ole Hansen, head of commodity strategy at Saxo said, “The UK economic situation looks increasingly dire with the risk of further Sterling weakness underpinning a sticky inflation story, making it increasingly difficult for the Bank of England to support economic growth through lower funding costs.
“Energy prices have surged out of the block in 2025 with crude oil and natural gas prices rising amid strong winter demand, especially in the US, and added sanctions on Russia potentially lowering supply, thereby underpinning an otherwise muted price outlook in 2025 amid ample non-OPEC+ supply and soft demand.
Read more related news:
Economists are warning inflation could rise ‘above 3%’ which will be blow for interest rates
The Chancellor is ‘hanging on by her fingernails’ as ‘business confidence has crashed’
“From an investor perspective, the combination of sterling weakness and gold strength has driven a 5% rise this January in XAUGBP, a year-on-year increase of 38%. A great deal better than the FTSE which trades flat on the month, and 8% YoY.
“Consumers will feel the pain as the prospect of rate cuts are lowered while import prices rise.”
Traders are preparing for “the pound to slump” by as much as 8% as it remains under pressure amid government borrowing.
Bloomberg reported, “There’s sizable demand for contracts that pay out below $1.20 — around 1% lower than where the currency was trading on Monday — according to data from the Depository Trust & Clearing Corporation.
“Some traders are even betting on sterling falling below $1.12, the weakest level in more than two years.”
On Monday, Jamie Niven, a fund manager at the asset management firm Candriam, told Bloomberg, “The path of least resistance is lower at this juncture.
“On one side, you have very limited pricing in of Bank of England cuts, while the fiscal concerns are also sterling negative.”
However, Tony Redondo, founder at Cosmos Currency Exchange, has warned this could fall to $1.15.
“The pound has already fallen by over 2.5% against the euro and by nearly 5% against the dollar since Christmas,” he said in comments provided to Sky News Money by Newspage.
“Further falls are expected across the board. They are expected to be more muted against the euro given the stagflation fears that hover over the eurozone economy and the political paralysis in its two leading economies, Germany and France.
“Against the dollar, the pound could continue to freefall. Last Friday’s stellar employment data only adds to the idea gripping the markets that the Federal Reserve will move slowly in cutting interest rates in the US in 2025 in an economy that continues to outperform.
“Add in the fact that Trump’s inauguration is now just over one week away and the negative economic effect his tariff plans could have on both the UK and eurozone economies could see the pound trade at 1.15 or lower against the greenback.”
