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Why is the British pound suddenly dropping in value? Image Credit: Agency

Dubai: The exchange rate between the British pound and US dollar narrowed considerably on Wednesday as the UK currency further devalued on widespread worries over the state of the economy.

Against the UAE dirham, while one British pound gave you 4.43, the US dollar was pegged at 3.67. Check the latest forex rates here. Currently, the GBP/USD exchange rate is at around $1.21, which is down roughly down half a per cent from this morning’s opening figures.

Weakness in the pound's value against the US dollar will be automatically reflected in its exchange rate with the UAE dirham as the UAE currency is pegged to the dollar.

While bets on an imminent 0.75 per cent rate hike from the US may have also pushed the currency pair lower, a risk-off market mood could have prompted losses for GBP/USD, multiple forex analysts evaluate.

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The pound slipped against its rivals on Tuesday after figures indicated a poor performance for the UK’s retail sector in July.

Why is the British pound falling?

The pound slipped against its rivals on Tuesday after figures indicated a poor performance for the UK’s retail sector in July. According to the trades figures, July’s retail sales balance fell to -4 with expectations of a drastic fall to -14 in August.

While analysts flag that the UK’s cost-of-living squeeze has continued to hit household budgets and limit unnecessary spending, additionally, political uncertainty also likely contributed to the pound’s falls with the PM leadership race continued between remaining candidates Rishi Sunak and Liz Truss.

Moreover, uncertainty surrounding the future interest rate hikes from the Bank of England (BoE) may have also weighed on the pound. Expectations are split between a 0.25 per cent or 0.5 per cent rate hike from the BoE at their next meeting, and a survey by Reuters found that 90 per cent of economists expect the central bank to push ahead with the latter.

Looking ahead for USD, the US' interest rate decision on Wednesday could see some gains for the currency. However, markets have largely priced in a 0.75 per cent rate hike however so any movement for the currency could be limited.