UK fuel crisis sparks drop in sterling over slowdown worries

The pound sank to its lowest point in eight months on Tuesday as investors worried that the fuel crisis sweeping the UK could lead to a sharp slowdown in growth at the same time as a surge in inflation.

Sterling fell as much as 1.2 per cent to $1.353, its biggest one-day drop against the dollar this year and the lowest level since January. Analysts said the panic buying of petrol over recent days was the symptom of broader supply chain issues that threaten to undermine the economy’s recovery from the Covid pandemic.

Shortages of fuel “have at least increased the tail risk of the country coming to a standstill in the near term,” said Shreyas Gopal, a currency strategist at Deutsche Bank. “And even if fuel panic-buying stops by the end of the week, as the government and industry expect, the UK’s more structural supply problems will remain. The fuel shortage is to some extent simply the vehicle through which the wider labour shortages are biting the most at the moment.”

The fall in the value of the pound, which also lost 1.2 per cent against the euro, came despite a surge in UK government bond yields as investors anticipated a rise in interest rates by February next year, following a hawkish policy announcement by Bank of England last week. Investors have not responded to the prospect of higher rates by buying sterling — as is more typical — because they worry that the BoE’s plans stem from concerns over high inflation rather than accelerating growth.

“Markets are starting to fret over the BoE being forced into tightening policy against a pretty weak backdrop,” said Derek Halpenny, head of research for global markets at MUFG. “Looking at sterling today, it’s kind of a stagflation story.”

Gas prices have surged across Europe, but Halpenny said sterling was bearing the brunt of inflationary fears in part because Brexit-induced labour shortages were exacerbating problems in the UK. “There’s a reason currency markets are homing in on the UK. You’re not seeing the same kind of severe shortages on the Continent.”

Tuesday’s declines mean the pound has now fully reversed its strong start to 2021, when the swift rollout of Covid vaccines prompted investors to bet the UK’s recovery could forge ahead of other countries. Sterling has now lost nearly 5 per cent against the dollar since its peak of just above $1.42 in late May.