On Friday, the British pound plunged to a 37-year low as new data revealed that consumers are cutting down on spending as inflation strains household budgets. This highlights concerns that the economy may already be contracting.

After the Office for National Statistics revealed that retail sales in August declined 1.6 per cent month-over-month, the worst drop since December 2021, the currency sank below USD 1.14, its lowest level since 1985.

The pound has been severely damaged by a run of dismal economic data and the sharp increase in the US dollar value, a safe haven asset that attracts investment during uncertain times. The likelihood of another significant rate hike by the Federal Reserve next week has helped the dollar approach its best level in about two decades against a basket of major currencies, according to the study.

However, the British pound is suffering more than most currencies because of the country’s economic outlook. It has lost more than 15 per cent of its value against the dollar this year, compared to a 12 per cent decline in the euro.

A plan by Prime Minister Liz Truss to subsidise energy bills for households and businesses could ease the pain this winter but may not be enough to restore growth. The Bank of England forecast a lingering recession before her plan was announced.