The pound is in free fall — and the Bank of England just warned it could be hammered even harder by Brexit

The British pound slumped to a two-year low on Thursday after the Federal Reserve said it wasn't planning to follow its interest-rate reduction with further cuts.

Sterling slid to about $1.208, withing striking distance of $1.204, the low it hit in January 2017.

The Bank of England cut its growth forecasts and pegged the risk of a recession by the start of 2020 at one in three.

The British pound slumped to a two-year low on Thursday, and it may have further to slump yet.

Signs of slowdown in the UK economy and uncertainty over the nation's looming departure from the European Union are weighing on the currency. The Bank of England maintained interest rates on Thursday, but cut its GDP growth forecasts from 1.5% this year and 1.6% in 2020 to 1.3% in both years.

The central bank warned sterling could fall even further in the case of a no-deal Brexit. It also pegged the chances of the UK economy plunging into recession by the start of 2020 at one in three, as Brexit fears continue to hammer sentiment.

The bank has indicated it could raise or lower rates until Brexit is resolved, but markets are pricing in a cut to come, said Neil Wilson, chief market analyst for Markets.com.

“Faced with the slowdown in the global economy, easing by other central banks, and some weaker high frequency data in the UK, it's looking tougher and tougher for the Bank of England to maintain this tightening bias,” he said in a research note.

The pound has now suffered its second-steepest drop in a prime minister's first week since 1976, according to Refinitiv data. It has shed 2.6% since Boris Johnson's appointment, while it fell 4.4% after David Cameron took office.

The Federal Reserve also said it wasn't planning to follow up its interest-rate reduction with further cuts.

Sterling slid to about $1.208 as investors who had dumped dollars on the prospect of lower interest rates — which discourage saving and encourage spending, boosting demand for riskier assets — piled into the greenback once again. The currency is now within striking distance of $1.2040, the low it hit in January 2017.

The dollar gained after Fed Chair Jerome Powell described the central bank's rate cut as a “mid-cycle adjustment” intended to protect against downside risks to the US economy, not the start of an easing cycle. The conservative stance also drove stocks lower and sent the two-year Treasury yield to a two-month high, fanning fears of a recession.