Pound falls against both dollar and euro as Boris Johnson continues tough stance • What does the falling pound mean for holidays and prices?

This article is more than 1 year old

This article is more than 1 year old

The pound has faced renewed selling pressure amid rising fears that Boris Johnson could take Britain out of the EU without a deal, raising the prospect of rising prices for consumers and hitting holidaymakers in the pocket.

Sterling continued to slide on the foreign exchanges on Tuesday after tumbling the most in a single day since November on Monday, taking the currency to the lowest level for 28 months.

The pound fell 0.5% against the US dollar and the euro on Tuesday, taking it to $1.2153 and €1.0905 on the money markets. However, there were reports of sterling being offered at parity with the euro at bureaux de change at major airports, with some customers at Heathrow being offered less than one euro per pound.

What does the falling pound mean for holidays and prices? Read more

Neil Wilson, the chief market analyst at Markets.com, said sterling was facing “relentless selling pressure”, adding: “The reasons behind the slide are well trodden but worth noting again: increased risk of a no-deal Brexit as the new government regime pivots squarely towards making no-deal a reality.”

Sterling has had the worst month since October 2016, losing 4.3% so far in July, with the pound the worst-performing major currency in the world since Johnson entered Downing Street last week.

Visiting Wales on Tuesday, the new prime minister said the government does not comment on the currency. As a newspaper columnist in the 2008 financial crisis, Johnson had said a falling pound was a symbol of “national humiliation” as he attacked Labour’s economic policies under Gordon Brown.

As the pound continued to slide on the foreign exchanges, economists warned inflation could rise as a consequence, pushing up the cost of living for UK consumers. When the pound falls, inflation goes up as importing goods to Britain becomes more expensive.

Victoria Clarke, an economist at the City bank Investec, said: “If we look back to the sharp drop in the pound after the Brexit referendum there were some pretty sizeable consequences for inflation down the line. It was material and squeezed household cash positions quite significantly.”

When the pound plunged straight after the EU referendum in 2016 inflation rose to the highest levels in five years, putting pressure on household budgets and harming the high street as retail spending slowed.

“If the pound hangs around at these levels for a few months we would start to see rising inflation,” Clarke added.

The Bank of England has a 2% inflation target and would in normal circumstances raise interest rates to keep inflation under control. However, faced with a global economic slowdown and no-deal Brexit risks at home, the Bank has limited room for manoeuvre.

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Fabrice Montagné, the chief UK economist at Barclays, said: “[The Bank will] insist that economic uncertainty is translating into policy uncertainty.”

The Bank of England will provide an update on its thinking at the publication of its quarterly inflation report on Thursday.

The lower pound could benefit UK exporters, as British goods become cheaper for overseas buyers. However, economists question whether the sharp drop in 2016 led to a significant rise in exports, as UK companies have complex supply chains – requiring components from abroad that went up in price, eroding their margins.

Andrew Wishart, UK economist at consultancy Capital Economics, said the betting markets implied the chances of no-deal Brexit had risen to about 38% from 30% last week. Crashing out without a deal could send sterling tumbling to parity against the dollar, breaking the all-time low of $1.05 recorded in 1985.

“Betting odds probably underestimate the likelihood of a no-deal Brexit as they only cover the chances of one this year,” he said.