The pound extended its losing streak against the dollar on Monday as recession fears and the fallout from the Bank of England’s (BoE) cautions rate hike rippled into the new week.
This caused the UK currency to slip to yet another two-year low – an almost daily occurrence of late – before steadying itself and scrambling out of the 1.22 range.
The pound’s downward spiral was accelerated last week after the BoE raised borrowing costs by a further 25 basis points but warned that the UK economic outlook had deteriorated significantly. This prompted investors to scale back bets on the number of rate hikes this year, which weighed on the pound.
Bank of England policymaker Michael Saunders – who voted for a larger rate hike than most of his MPC contemporaries last week – said on Monday that he’s concerned inflation could get hotter than BoE forecasts, which expect it to exceed 10% later this year.
Speaking at the Resolution Foundation think tank, he said: “I put considerable weight on risks that, unless checked by monetary policy, domestic capacity and inflation pressures would probably be greater and more persistent than the central forecast.”
“As a result, my preference has been to move relatively quickly to a more neutral monetary policy stance.”
Saunders was one of three members of the central bank’s nine-strong MPC that voted to hike the Bank Rate from 0.75% to 1.25% at their May meeting – a move that failed to gain traction after a majority of six members backed a smaller rise to 1%.
Dollar lifted by rising yields and risk aversion
The dollar benefitted from strong tailwinds on Monday generated by rising Treasury yields and a wave of risk aversion following Friday’s US jobs report. Accelerating payroll growth in April left little room for the Federal Reserve to change the course of its aggressive policy tightening plans.
The latest leg of the dollar’s rise began on Wednesday after the Federal Reserve announced its biggest interest rate increase in over 20 years.
Fed policymakers Williams, Barkin, Waller, Kashkari, Mester, and Bostic all have speaking engagements on Tuesday. Investors will listen intently for clues about future US monetary policy plans.
British Retail Consortium like-for-like retail sales for April hit the headlines on Monday evening. They are forecast to sink even lower after falling in March amid the cost-of-living squeeze, which triggered the sharpest drop in consumer confidence since the 2008 financial crisis.