The pound will fall to a record low against the dollar by summer next year and the FTSE 100 will see a sizeable further decline, according to one economist, as the UK economy suffers a recession and the US only a mild slowdown.
Sterling on Wednesday fell back to its Covid lows and close to a 30-year bottom, with gilts also selling off and the euro also hit hard.
Both the pound and euro are likely to plumb even further depths, predicted Paul Dales, chief UK economist at Capital Economics, as the energy crisis pushes both the eurozone and UK economies into recession.
He forecast that as the US "gets away with a milder slowdown", this would suggest that the euro and the pound will weaken further against the greenback.
As a result Capital Economics now forecasts the pound will fall to around US$1.05 by the middle of next year.
Dales noted that this would be below the levels reached before the 1985 Plaza Accord (US$1.09), after the UK left the ERM in 1992 (US$1.43), during the 2008/09 Global Financial Crisis ($1.38), after the 2016 Brexit vote (US$1.21) and during the 2020 COVID-19 crisis (US$1.15).
"In fact, $1.05 would be an all-time record low," said Dales.
He also said this would be twinned with a "big decline" in the FTSE 100.
Dales said he expected a small fall in 10-year gilt yields as high inflation prevents the Bank of England from cutting interest rates as soon as the financial markets anticipate.