The pound shifted from reverse into neutral on Tuesday, having slipped to a fresh multi-month low against the dollar the previous day on signs that economic weakness will force the Bank of England (BoE) to slow its interest-rate hiking cycle.
The UK currency traversed the 1.23 range, just above a low of 1.2262 reached on Monday – its lowest level since June 2020.
This represented a modicum of stability for the embattled pound following a testing couple of weeks that has seen it stumble from one low to the next against the dollar.
On Thursday, the BoE hiked borrowing costs again but warned the economy could shrink in 2023 and GDP could fall around 1% in the fourth quarter of 2022.
Further evidence of the deteriorating growth outlook emerged on Tuesday after a closely watched report showed consumer spending faltered last month amid the cost-of-living squeeze.
British retail sales declined in April as consumers tightened their belts in the face of rising prices, according to new industry figures.
Data compiled by KPMG and the British Retail Consortium (BRC) showed that retail sales dropped at an annual rate of 0.3% last month – the first decline in 15 months.
BRC chief executive Helen Dickinson said: “The rising cost of living has crushed consumer confidence and put the brakes on consumer spending.”
Fed comments cause dollar to edge lower
The safe-haven dollar edged lower on Tuesday despite fragile investor sentiment.
Comments from Atlanta Federal Reserve President Raphael Bostic applied pressure to the dollar on Monday. Bostic dampened expectations that the Fed will raise interest rates by more than half a percentage point at its June meeting: “I would say that (a 75-basis-point rate hike) is a low probability outcome given what I expect will happen in the economy over the next three to four months,”
Last week the US central bank announced a 50 basis point hike – its largest increase since 2000. Since then, expectations have been growing that the Fed will lift rates even more aggressively to tackle sky-high inflation.
Bostic’s view was supported by New York Fed President John Williams on Tuesday who said: “I do think as a base case of thinking, 50 basis point increases makes sense exactly as Chair Powell laid out,”
“We are removing accommodation pretty quickly…and that gives us a little space to move in something like the 50 basis point increment at the next couple of meetings.”
Looking ahead
Investor attention is now focused on the US consumer price inflation report, due for publication on Wednesday, which is expected to show that price rises eased slightly in April.
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