The pound sunk to a fresh two-year low against a surging dollar on Tuesday as the Conservative leadership contest gathered pace, adding to uncertainty in an increasingly beleaguered economy
The UK currency slid below 1.19 at the start of the week and extended its losses on Tuesday, hitting its lowest level since March 2020 before bouncing off 1.18.
Political chaos in Westminster compounded the UK’s concerning economic outlook, presently clouded by decades-high inflation, the risk of a recession, Brexit, and the cost of living squeeze.
Bank of England Governor Andrew Bailey told lawmakers on Monday that he still believes inflation will drop sharply next year, broadly in line with forecasts the Bank released in May. Though he stated that he always goes into forecasts with an open mind, and “that’s critical”, he thought the essential aspects of that profile remain.
The economic outlook got even gloomier overnight on Monday in the wake of analysis by the British Retail Consortium (BRC) and KPMG, which showed retail sales declined by 1% in June. This figure compares to an increase of 10.4% a year earlier.
Cost of living pressure dented UK retail sales as volumes dropped for a third straight month to a level not seen since the depths of the pandemic.
Dollar lifted by the risk-off mood in markets
The safe-haven dollar grew higher on Tuesday by reducing risk appetite ahead of the much-anticipated US inflation report on Thursday and the Federal Reserve’s expectations of aggressive rate hikes to cool consumer prices.
Bank of England governor Andrew Bailey speaks on Tuesday evening at an event hosted by the Official Monetary and Financial Institutions Forum.
The UK’s latest monthly GDP figures are due on Wednesday and will likely show no growth in May, reinforcing expectations of an economic contraction in the second quarter. According to official ONS figures, the domestic economy shrunk by 0.3% in April, following a slight decline in March.
Investors will keep a keen eye on US consumer price data due on Wednesday, with economists expecting the index to print an 8.8% annual rate for June – up from 8.6% the previous month. The reading will help gauge the extent to which inflation has peaked ahead of next week’s Fed policy meeting, which expects to produce a second consecutive 75 basis points rate hike.
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