The pound rose after the release of better-than-expected retail sales for April.  UK retail sales volumes rose by 1.4% in April after falling 1.2% in March. The result is higher than the -0.2% the market was expecting. While rising inflation might not have destroyed consumer spending, economists are warning that the BoE will need to act immediately to curb inflationary pressures.

Retail sales

Food store sales volumes rose 2.8%, as consumers spent more on alcohol and tobacco in supermarkets. Alcohol and tobacco sales volumes jumped 8.4% in April, suggesting that consumers spent more time visiting the off-licence instead of the pub. Clothes sales also rose as the summer holidays and weddings are approaching. Fuel sales rose 1.4% after they fell 4.2% in March following higher petrol prices.

The wider picture is however disappointing as over the last three months, sales volumes fell by 0.3% when compared with the previous quarter. As ONS deputy director for surveys and economic indicators Heather Bovill said: “Retail sales picked up in April after last month’s fall. However, these figures still show a continued longer-term downward trend.”

Some analysts are optimistic and have noted that the report shows that the cost-of-living crisis hasn’t destroyed consumer spending. While things may get worse as inflation rises further, economic activity remains resilient.

Rising inflation: BoE chief economist’s warning

Huw Pill has warned that monetary policy needs to be tightened to stop inflation getting out of hand. In a speech to the Association of Chartered Certified Accountants in Wales, Pill said that the central bank has to deal with soaring inflation which threatens to become embedded in domestic price setting and slowdown growth by squeezing household incomes. Pill said that “the balance of risk is tilted towards inflation proving stronger and more persistent than anticipated in that baseline.”

In response to Pill’s warning, Samuel Gee, director at Bristol-based Manning Gee Investments, said that rates will continue to rise, but the economy will cope with more gradual increases, as the Fed’s more aggressive hiking plan has already countered concerns. In the UK, with an economy recovering from the pandemic and a war in Europe, there are many difficulties and risks.

Allan Monks, economist at JPMorgan, said that Pill’s concerns reveal that the MPC is perhaps “leaning towards a more hawkish interpretation” of the bank’s recent guidance.

Another warning came from former Bank of England governor Mervyn King who said that British people should expect a "very unpleasant period", with "considerable" interest rate hikes.

Lord King attacked central banks including the Bank of England and said they should take responsibility for the cost of living crisis which has pushed inflation higher. He said they would have to raise interest rates immediately: "It takes tough action. And it's not a pleasant period through which we're going to have to go."

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Growth concerns and recession worries have hit markets and the pound is expected to be weighed down if global investor sentiment remains gloomy. Late on Thursday, it recovered much of Wednesday’s decline, benefitting from a weaker US dollar.

Stock markets fall

Following the warnings of rising costs from US retailers Target and Walmart this week, market confidence was hit. While early this week the pound rose, a change in sentiment midweek has pushed it lower. The FTSE 100 which has a positive relationship to the pound, was down 2.2% on Thursday, with consumer goods and services firms, energy companies, banks and industrial stocks being some of the worst-performing sectors.

Royal Mail was leading the selloff, which fell over 10%, after warning about rising inflation and slowing growth. Investment group 3i (-8.3%), distribution firm Bunzl (-5.6%) and technology investor Scottish Mortgage (-5%) were also lower. Kingfisher (-4.8%), Tesco (-4.8%), and Unilever (-4.7%) fell too, as concerns about consumer spending being hit due to rising inflation rose.

As AJ Bell investment director Russ Mould said, “After the Walmart wobble on Tuesday, Target struck terror into the hearts of the US retail sector and was a big contributing factor behind the worst day for US markets since 2020 on Wednesday. The extent of the impact of inflation on these giants of American retailing has woken investors up, once again, to the huge impact surging prices are having on every facet of the economy.” This along with potential aggressive rate hikes from the Fed and stagflation concerns, have hurt investor sentiment.

UK manufacturing confidence falls

In the UK, confidence among UK manufacturers has fallen, despite UK manufacturing output growing at its fastest pace in ten months over the three months to May. According to the CBI’s latest Industrial Trends survey, confidence dropped in the last quarter, with investment plans for buildings and machinery plummeting. Many firms are also planning to raise their prices which will add more pressure to the households already struggling with higher costs.

Global concerns about rising inflation

In the near-term, the pound could respond to changes in global market sentiment. If the current stock market selloff continues, then Sterling will underperform, especially against the US dollar.

At the moment, investors are concerned about rising inflation and a possible recession in global economies, including the US, UK and the Eurozone.

Analysts have noted that any potential gains for the pound or stock markets will be temporary. A key concern for markets is the expected tightening of monetary policy in the US, with 50 basis point hikes expected at the next three policy meetings. This means that the cost of borrowing will not only rise in the US but also across other global economies.

The shocks from the war in Ukraine as well as the Covid lockdowns in China have also sparked global concerns about an economic slowdown.

Once markets start recovering and sentiment strengthens, then the pound may start to recover too. Morgan Stanley expects the current risk-off phase to come to an end around the third quarter of 2022, since by that time rate hike expectations will have reached their zenith alongside inflation. But analysts at Barclays said that positive global conditions could take up to a year to return. Others are more positive, as they believe economic data remains strong and consumer demand will not be destroyed.

What’s coming up

Any comments around the BoE monetary policy tightening will be a key driver for Sterling for the rest of the week, while April retail sales data due out on Friday, will also provide direction. The March report was the main cause of the mid-April drop in GBP/USD, as it highlighted the cost-of-living squeeze. If the retail sales report disappoints, and risk appetite remains weak in the coming days, then the pound to US dollar exchange rate could fall.

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UK inflation for April soared but came below market expectations, pushing the pound lower. UK headline CPI inflation rate printed at 9.0% year-on-year, which is below the 9.1% the market was expecting, but up from March’s 7.0% reading.

UK inflation is now at its highest level for more than 40 years due to the rising costs of gas and electricity which have pushed household energy bills higher after the rise of the Ofgem price cap in April. The next lift to energy prices will come in October when UK inflation is expected to reach close to 10%, according to the Bank of England.

UK inflation data

CPI inflation rose 2.5% month-on-month in April said the Office for National Statistics (ONS), higher 1.1% previously, but lower than the 2.6% the market was expecting. Core CPI rose 6.2%, but this was in line with the market's expectations. Month-on-month core rose 0.7% which was below expectations for 0.8%. The data is not a big surprise and won't alter market expectations for future Bank of England rate hikes.

Higher consumer prices

The rising cost of food and transport has pushed prices up, worsening the cost-of-living crisis. Not only households have faced the burden of rising costs but also businesses which are suffering from higher energy and fuel costs.

The ONS said the 54% increase in the energy price cap in April was the main reason the consumer prices index rose to 9%. Average petrol prices rose to 161.8p a litre in April with the average cost of diesel at the pumps hitting 176.1p a litre.

Prices at restaurants and hotels rose after the end of a temporary VAT cut for the hospitality industry.

The pound has weakened since last month adding more pressure on businesses as the cost of imports rose. Businesses are also experiencing a shortage of skilled workers, which combined with higher prices, could push the economy into recession, economists have warned.

The British Chambers of Commerce has called for the Chancellor Rishi Sunak to hold an emergency mini-budget, as inflation is damaging consumer spending and business investment, and the UK could enter a recession by the third quarter of the year.

The Chancellor has said he may support those on the lowest pay but the cabinet is divided over how to fund the billions of pounds that are said to be needed in extra subsidies or welfare payments, with some members being in support of a windfall tax on oil and gas companies.

Bank of England

The 9.0% rise in April’s consumer prices is in line with the BoE’s latest estimate and is not expected to change the Bank’s near-term guidance, as two more 25bp rate hikes this year are still priced in by markets. Bank of England policymakers will provide their feedback to the numbers at their meeting in June and markets expect a rate rise for the fourth time since last December to 1.25%.

However, economists are not sure how much further the Bank will go to raise interest rates, with some saying that it will raise rates twice before pausing.

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The pound rose against the euro, the US dollar and other major currencies after the release of better-than-expected UK inflation numbers. UK inflation rose to 2.1% for May according to the ONS, which is now above the Bank of England's 2.0% target.

High inflation means that the Bank of England could signal that it will tighten monetary policy soon, which will offer further support to Sterling.

Core UK inflation, which excludes the price of food, alcohol, tobacco and other volatile items, also rose to 2.0% in the 12 months to May, much higher than expected. This suggests that businesses are raising their prices following the lockdown due to rising costs. Most of the increases in music downloads inflation (from -5.1% to +3.4%) games, and hobbies inflation (from -0.6% to +2.7%), will be reversed in June, according to analysts.

UK Inflation

With the UK economy slowly emerging from the Covid-19 lockdowns, the cost of fuel, clothing and eating out increased pushing inflation across the UK higher and over the Bank of England’s target for the first time in almost two years. The UK consumer price index jumped to 2.1% in May, which is the highest CPI reading since July 2019.

The Office for National Statistics said that transport was one of the biggest sectors who boosted inflation, as petrol prices rose significantly. Prices for clothing, games and recording media rose, while meals and drinks consumed out also helped to increase the cost of living. Food and non-alcoholic beverages’ prices fell this year, after rising a year ago.

The rise of core inflation to 2.0% in the 12 months to May has created some concerns that inflation could rise over the Bank of England’s 2% target for longer than expected. BoE’s chief economist Andy Haldane stressed that Britain was at a dangerous moment, with “some pretty punchy pressures on prices” and the risk that prices could begin “a game of leapfrog”, and possibly lead to a wage-price spiral.

Inflationary pressures building up

There are signs that inflationary pressures are building up in the economy, with UK producer prices rising as manufacturers increased prices by 4.6% year-on-year in May 2020, up from 4% in April. These prices could eventually be passed on to consumers.

Pricier metals and crude oil costs helped to push input costs higher, with copper hitting a record high in May, and oil reaching pre-pandemic highs. The ONS said: “Transport equipment, and metals and non-metallic minerals provided the largest upward contributions to the annual rates of output and input inflation respectively.”

As Yael Selfin, chief economist at KPMG UK said these pressures will ease next year, which means that the Bank of England will probably resist raising interest rates soon. She noted: “Short-term inflationary pressures brought about by a perfect storm of rising oil prices, supply chain misalignments as the global economy reopens and border frictions with the EU, saw UK inflation rise to 2.1% in May, above the Bank of England’s target level of 2%. Changes to VAT will push inflation further this year, although we expect it to average 1.9% this year and 2.2% in 2022. There is a greater level of uncertainty about prices at present, with a possibility that inflation will turn out to be higher if staff shortages persist, triggering stronger wage rises, while cost increases continue to be passed on to consumers. However, with price pressures expected to ease next year and inflation to stabilise around 2%, it is likely that the Bank of England will hold fire and not raise interest rates before 2023.”

For those watching currency markets, the inflation numbers merely confirm that the UK economy is slowly improving, and this should be positive news for the pound as it will remain in demand.

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Concerns about the Covid-19 pandemic are weighing on the markets and have impacted on global investor sentiment again, amid a surge in coronavirus cases in countries such as India and Japan. This has also pushed the value of Pound Sterling against the Euro and Dollar lower, confirming that global market sentiment will need to improve to boost the pound.

Yesterday, European markets also experienced their biggest fall this year, with airlines and hospitality firms severely affected. The pan-European Stoxx 600 lost 1.9% and the London FTSE 100 lost 2%.

The release of ONS data on Wednesday morning has done little to change things. UK consumer price index (CPI) data showed that the inflation rate rose to 0.7% in March 2021 from 0.4% in February. This is the first increase from fuel prices since February 2020 which helped drive the increase in March. UK CPI inflation rose by 0.3% m/m. However, in the long-term, increases in several of the producer price index (PPI) numbers signal potentially more inflation in the future which will be positive for GBP, as this will drive the Bank of England to tighten UK monetary policy.

Weaker pound

The pound is generally affected by global market sentiment and it traditionally benefits when the global economy is growing, and investor sentiment is positive. This is why declines in the stock market are reflected by similar declines in the pound. While positive economic releases can have a beneficial effect on the pound, the global conditions can overshadow such domestic data.

The pandemic has had a massive impact on the pound’s travails, and this is also what is happening right now as risk appetite has been under pressure with the number of Covid-19 infections rising in Asia. The WHO said that the number of cases has surged in all regions except Europe. In Japan, Tokyo and Osaka have asked the government to declare a state of emergency from 29th of April 29 to 9th of May 9.

FX analysts at Bank of America have said that “a pro-cyclical, risk-on environment should be GBP supportive as it will for other high beta currencies. What will see GBP standout is whether the UK can continue to attract investment inflows, which have been a hallmark of the recent appreciation."

UK Inflation Data

The release of inflation data has not influenced the pound, as investors are waiting to see how the country manages to move back to normality. Investors will be more interested in Friday’s release of PMI data for April, as it will offer a clear picture of how strong the rebound has been after reopening businesses on the 12th of April.

Wednesday’s release of inflation numbers showed that the annual CPI inflation rate has gone from 0.4% in February to 0.7% in March according to the ONS, and it was driven by a 0.3% month-on-month rise recorded in March.

"The UK has reached a turning point in its economic reaction to the pandemic where price growth is now on an upward trajectory, and should remain so for some time to come. Year-on-year consumer price growth slowed to 0.4% in February from 0.7% in January, primarily due to falling prices in clothing and footwear," Paul Craig, portfolio manager at Quilter Investors said. He added: "From here, inflation may tick markedly higher if the steady drip of consumer spending morphs into a waterfall as lockdown restrictions are lifted and households spend some of their accumulated pandemic savings.”

The UK will need a bit more time to recover and the economy to become more normalised until the Bank of England will consider raising interest rates. The Bank of England has stressed that the economy will need to reach pre-pandemic levels and the inflation target to be met, before it makes any move.

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The pound rose against the dollar on Wednesday, as the greenback was under pressure following the release of disappointing US retail sales figures for August.

The GBP/USD pair rose higher to weekly tops, despite the Brexit impasse and the latest saga with Boris Johnson’s Internal Market bill.

Wednesday's main event was the highly anticipated FOMC monetary policy decision - where rates look set to remain stable at near zero - and updated economic and inflation projections, ahead of Thursday’s BoE meeting. Due to the key FOMC event, trading opportunities and volatility around the GBP/USD currency pair might arise ahead of the event.


The pound was also supported after Justice Secretary Robert Buckland hinted the Government could amend the Internal Market Bill in order to compromise with Tories criticising the PM for breaking an international treaty and avoid a rift within the Conservative party. The government’s change of heart could help soften the EU’s stance and resume negotiations with the EU.

Buckland said that the original plans in the Bill could be made "acceptable to all Conservative colleagues".

With investors digesting the political reality and remaining confident that a deal is still possible, the pound was lifted after the initial news of the Internal Market bill.

"Outsized moves in GBP ... have injected a sizeable risk premium in GBP. It's now trading at a decent discount on our short-term valuation, underscoring that some of the recent Brexit news has already been priced in. At the very least, this backdrop suggests that in the coming weeks GBP would benefit more from good news rather than sink further on bad news. We still expect more volatility but risk/reward favours taking profit at these levels," said Mark McCormick of TD Securities.

Bank of England Policy and Interest Rate Decision on Thursday

The Bank of England will try and assess on Thursday the UK’s economic recovery and whether it needs to adjust its policy to offer more monetary support. For many economists, now it is not the right time to make significant changes to its package. Adding to the Bank’s woes about the UK economy comes the UK inflation which fell to its lowest level in nearly five years, to an annual 0.2%, far away from the Bank’s official 2% target.

The Bank is expected to take action in its November meeting, as the economy slowly recovers. According to the Organization for Economic Cooperation and Development forecast released on Wednesday, UK gross domestic product would shrink by 10.1% this year, while the economy is forecast to rebound in 2021. Given the political and economic uncertainty, the BoE will possibly wait and see what kind of fiscal stimulus is necessary to support the economy. But Reuters noted that “While the central bank is widely expected to hold fire, policymakers are likely to conclude that downside risks to the economy are rising for the economy due to rising Brexit uncertainty and renewed restrictions on social activity.”

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The latest release of the UK inflation figures has failed to provide a boost to the pound. Despite the recent Brexit optimism, the pound did not rise further after the latest inflation figures which came in line with expectations.

The GBP did not react to the news that inflation fell to 0.5% during May as it was expected. Sterling’s upside is also considered to be limited as traders are expected to remain cautious ahead of the latest monetary policy update by the Bank of England on Thursday. The BoE is expected to keep rates at 0.1% and increase its quantitative easing programme by £100bn.


According to the Office for National Statistics, the UK consumer price inflation eased for the fourth consecutive month in May, coming at an annual rate of 0.5%, meeting expectations. Inflation has fallen after a record fall in fuel prices which dragged the UK's inflation rate down. This was due to the lockdown as May was the second full month of the coronavirus lockdown restrictions. This was the lowest annual rate recorded since the Brexit referendum vote in June 2016.

Economists said that this will inevitably add to the discussions of whether the Bank of England will likely take Bank rates into negative territory.

ONS deputy national statistician Jonathan Athow said: “The growth in consumer prices again slowed to the lowest annual rate in four years. The cost of games and toys fell back from last month’s rises, while there was a continued drop in prices at the pump in May, following the huge crude price falls seen in recent months. Outside these areas, we are seeing few significant changes to the prices in the shops.”

Rising prices for food and non-alcoholic drinks helped offset the pressure from the falling oil and petrol prices in May.

What economists say

Economist James Smith explained that the UK inflation will stay below 1% this year:

“The other argument that is often made in favour of inflation returning, is that governments and central banks are pumping vast amounts of cash into the system. But this is unlikely to lead to higher prices, at least in the short/medium-term. In the case of the government, its spending has so far been solely aimed at keeping firms and consumers afloat, rather than trying to stimulate demand (which by definition, is constrained by the ongoing lockdown measures). The bottom line is that inflationary pressures are likely to remain fairly muted for the time being. This, in turn, will keep the pressure on the Bank of England to maintain its current degree of stimulus, and we expect a further £150 billion of QE to be unveiled this week.”

Chief UK economist at Capital Economics, Paul Dales, also said that "May's further fall in inflation is probably only the beginnings of a prolonged period of very soft price pressure." This he clarified, will drive MPC members to ask for more stimulus to boost the economy on the BoE’s policy meeting on Thursday.

For many businesses and consumers, the year ahead appears to be a very tough one, with more pressure on households. Businesses and employers have been hurt, and there is generally pessimism about the status of the UK economy due to the coronavirus and a possible second wave of Covid-19 cases.

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A weakening global investor sentiment and a collapse in oil prices has hurt the pound, but the British currency gained slightly on Wednesday despite news that UK inflation fell in March.


Brent crude oil lost a further 10% in value and WTI crude 5% on Wednesday. The slump in global oil prices demonstrates the massive drop in activity which hasn’t yet been priced by markets. Later on Wednesday, there was a jump in the price of oil, partly the result of a tweet in which President Donald Trump said  that he had “instructed the United States Navy to shoot down and destroy any and all Iranian gunboats if they harass our ships at sea.”


After the government’s Covid-19 lockdown measures which hit demand for some goods, inflation figures on Wednesday painted a negative image of things to come, as the Office for National Statistics (ONS) reported a 0.2% drop. While this was expected, as consumers spent less on clothing and fuel due to the lockdown, there are concerns that there will be further drops if restrictions continue. The pound could fall further if dire economic data continues, the oil market is further weakened, and investors’ mood drops.

According to the ONS, consumer prices rose by 1.5% per year last month, down from 1.7% in February, which was the lowest since December, as cheaper clothing and fuel pushed inflation down. The ONS explained: “Falls in the price of motor fuels and clothing resulted in the largest downward contributions to the change in the CPIH 12-month inflation rate between February and March 2020. Rises in air fares produced the largest, partially offsetting, upward contribution to change.”

The ONS believes that people avoided shops or stockpiled essential items due to the coronavirus. While the lockdown was officially introduced on 23 March and prices were collected around 17 March, social distancing seems to have shaped consumer behaviours and retailers’ expectations, with less browsing in shops and more time spent indoors.

The inflation report also showed that due to the virus pandemic and failure of the Organization of the Petroleum Exporting Countries (OPEC+) to agree to cut supply in early March 2020, petrol prices fell by 5.1 pence per litre between February and March 2020.

What did economists say?

The drop in inflation in March is just the beginning and demand will continue to wane. Equals Group chief economist Jeremy Thomson-Cook said: “UK inflation stayed steady at 1.5% in March but the wider picture around prices shows that we will not be talking about high inflation for some time. A recession like the UK is currently enduring – we will wait on the data to confirm – naturally will see lower inflation through the destruction of a demand side to the economy whilst movements in oil markets of late show just what can happen to prices when demand dries up. You cannot have inflation without demand and if we are correct that demand rebounds slower than it fell – a Nike tick-shaped rebound – then the impulse into inflation should be low although a weak pound does remain a risk.”

Laura Suter, personal finance analyst at investment platform AJ Bell, says that the drop in oil prices and the change in shoppers’ attitudes will affect inflation: “Even before the recent capitulation, the price of oil was on the slide in March and this dragged inflation down slightly from February’s 1.7% to 1.5%. Oil prices have a massive impact on the UK’s inflation rate and with prices at the pump and home energy costs getting cheaper we’d expect this trend to continue for the next couple of months….What’s more, with retailers having to shut their doors we’re seeing more and more offer discounts to shoppers to move their buying online.”


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