The pound was down 0.8 percent in morning trade in London at $1.137, the first time it has breached the $1.14 mark in nearly four decades, according to data from Refinitiv. The move reflected broad dollar strength as well as particular concern over the state of Britain’s economy. Sterling fell about 0.4% against the euro to €1.142, its lowest level since early 2021. Retail sales fell sharply in August as UK consumers grappled with rising prices and high energy costs, according to data released on Friday by the Office for National Statistics. The amount of goods bought in the UK fell by 1.6% between July and August, reversing a small expansion the previous month. That was a bigger drop than the 0.5 percent contraction forecast by economists polled by Reuters and the biggest drop since July 2021, when restrictions on accommodating Covid-19 were lifted. Olivia Cross, an economist at Capital Economics, said the data suggested “that downward momentum is accelerating” and supported her view that “the economy is already in recession”. The ONS said “rising prices and the cost of living” were weighing on sales volumes, which continued a downward trend from the summer of 2021 after the economy opened up after pandemic lockdowns. The data highlighted how high inflation has hit consumers and the wider economy. The government’s £150bn energy support package announced this month is expected to cushion the blow from the recent rise in gas prices, but has not dispelled the risk of a recession. Victoria Scholar, chief investment officer at Interactive Investor, said the fact that sterling fell against the dollar and euro on Friday showed that it was “not a dollar move. . . but in reality they are traders selling the pound amid negative sentiment about the UK’s economic outlook and investment case.” The Bank of England data also shows that sterling’s real exchange rate, a measure weighted to take into account its competitiveness against major trading partners, has fallen 6.5 percent since the start of the year. The range remains above the all-time lows reached in 2020 and 2016. The BoE is expected to raise interest rates for a seventh straight time at its meeting next week as it faces inflation nearly five times its 2% target. However, weak retail sales figures could lead the BoE to raise interest rates by 0.5 percentage point when policymakers meet next week, rather than the 0.75 percentage point increase some had expected, Gabriella Dickens said. senior UK economist at Pantheon Macroeconomics. The US Federal Reserve is widely expected to raise interest rates by at least 0.75 percentage points next week, and a smaller rate hike by the BoE could further dent the appeal of holding the pound. In a sign of the UK economy’s struggles, the amount of goods bought by consumers fell to almost pre-pandemic levels from a peak of almost 10 percent above April 2021. All major sectors fell during the month, but non-food stores were the biggest movers. This was driven by big sales declines at department stores, down 2.7%, homewares down 1.1% and clothing down 0.6%. The marked reductions in sports equipment, furniture and lighting gave “an indication of the items that consumers are pushing to the bottom of their priority list in difficult times,” said Sophie Lund-Yates, an analyst at financial services firm Hargreaves Lansdown. Online sales also fell sharply, down 2.6%, with food the third largest component of the monthly decline.

While food sales were particularly affected by the opening of the hospitality sector, the ONS reported that “in recent months, retailers have highlighted that they are seeing a decline in sales volumes due to increased food prices and the impact on the cost of living”. Fuel sales also fell 1.7 percent and were 9 percent below their pre-pandemic levels, reflecting the impact of higher prices at the pump on car travel despite easing in prices in August compared with the previous month. Lynda Petherick, head of retail at consultancy Accenture, said “with a tough winter ahead, it will be worrying for retailers that shoppers have already cut back on spending despite the hot summer”.