Sterling drops as falling UK house prices add to recession worries

Sterling fell on Thursday against the US dollar and euro as the Royal Institution of Chartered Surveyors said Britain saw in November the most widespread house price falls since early in the COVID-19 pandemic.

The survey showed demand from buyers and sales activity slowed in the face of higher borrowing costs.

Investors also pondered how interest-rate hike bets by the Bank of England will worsen the recession outlook in Britain.

The Bank of England (BoE) is expected to raise bank rate by 50 basis points to 3.50% next week despite the economy moving towards recession, as it battles inflation running at more than five times its target, a Reuters poll found.

Quarterly forecasts suggest the economy shrank 0.2% last quarter and will contract by 0.4% in this one, meeting the technical definition of recession.

The outlook for next year is just as gloomy, with the economy expected to shrink in the first three quarters of 2023, according to economists polled by Reuters.

The UK is facing a winter of strikes as workers from rail staff to teachers and nurses demand better pay as cost of living surged, aggravated by rising energy costs following Russia’s invasion of Ukraine.

Beyond real estate concerns, looming public sector strikes pointed towards additional macroeconomic risks, said Jeremy Stretch, head of G10 FX strategy at CIBC.

“Sliding house prices and burgeoning public sector strikes impacting activity underlines the prospect of sterling negativity, especially should risk uncertainty extend into year-end,” he said.

The pound fell 0.3% against the dollar to $1.2175, slipping from an almost six-month high of $1.2345 touched on Monday.

It fell 0.35% against the euro to 86.39 pence, after hitting a three-month high against the single currency earlier in December.

JP Morgan strategists expect sterling to fall 11% against the dollar in 2023 to $1.08.

Traders will be closely watching a raft of major central bank decisions next week, including those from the BoE, the U.S. Federal Reserve and the European Central Bank.