Sterling returns to its June 2020 low

Sterling returns to its June 2020 low

The British pound fell on Tuesday, returning to its lowest level in nearly two years, on concerns that the Bank of England will have to pause its rate hike cycle due to a weaker economy. The pound was 0.2 percent weaker against the dollar at $1.2305, close above the lowest level since June 2020 of $1.2262 recorded on Monday at 1503 GMT. “I think it’s pretty impossible to be positive sterling in the current environment,” Michael Brown, Caxton’s head of market intelligence, said, noting a dovish BoE, quickly declining growth, and high inflation. “If you’re looking for the optimum blend for a lower currency, sterling is about as close as you can go right now,” Brown continued.

Further evidence of the worsening growth outlook was seen on Tuesday after two reports showed British consumer spending stuttered in April as the cost-of-living crisis affects consumption. The British Retail Consortium said total retail spending among its members – mostly large chains and supermarkets – was 0.3% lower in April than a year earlier, the first fall since January 2021 when the country was under a COVID lockdown.

On Thursday, the BoE raised its benchmark interest rate to 1.0% but said it saw the economy shrinking in 2023 and a near 1% fall in gross domestic product in the final quarter of 2022. Markets are currently pricing in a further 106 basis points of tightening from the BoE this year, taking the benchmark rate to just above 2.0%.

Data from payment processor Barclaycard, covering a broader range of spending, showed outlays on essential items grew by slightly less in April than in March. Focus turned to the British government’s plans for the new session of parliament, where Prime Minister Boris Johnson said his Conservative government would “deliver on the promises we made” in the 2019 election.

“I think that the best case resolution for the pound is a sort of classic EU style fudge,” Brown said. “Whether we get that remains to be seen but definitely another risk to add into that mix that we’ve already got”. Against the euro, sterling was little changed at 85.60 pence, near its lowest level since December.

Analysts said the main focus would be on what the government said about the Northern Ireland Protocol which governs post-Brexit trade between the province and the rest of the United Kingdom. Johnson’s government urged the European Union to show new imagination in talks to resolve problems with post-Brexit trading rules, adding that it would take all necessary steps to protect peace in Northern Ireland.

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