The pound fell sharply against the euro and the US dollar following a risk-averse market environment and disappointing data releases from the UK. On the other hand, the risk-off mood increased demand for the safe-haven dollar, while the euro surged to a near two-week high as markets have priced in an early ECB rate hike.

The pound came under pressure following cautious comments from Bank of England (BOE) officials and disappointing data releases from the UK. The Office for National Statistics reported on Friday that retail sales fell by 1.4% in March.

On Thursday, BoE Governor Andrew Bailey noted that UK inflation was more like that of the Eurozone than the US: "We must not be complacent about inflation expectations” as we are walking "a very tight line between tackling inflation, and the output effects of real-income shock."

Gloomy UK data releases

The risks for Sterling have increased following lower than expected economic releases. UK consumer confidence fell to very low levels last seen during the financial crisis of 2008, as consumers are now less confident about the economy.

Retail sales for April also disappointed with a reading -1.4% month-on-month in March. S&P Global's PMI data for April showed a further slowing in growth rates as inflation has surged.

Investors are cautious as they believe the Bank of England will disappoint markets who have priced in a more aggressive tightening cycle. With Friday’s release of gloomy consumer and PMI data, as well as political uncertainty at home and abroad, analysts have become more sceptical.

PMI data

PMI data showed that there was further slowdown in UK economic growth with the S&P Global/CIPS Services PMI Flash for April reading at 58.3, much lower than the 62.6 in March. Manufacturing PMIs came higher at 55.3, but services account for a bigger share of the economy. The overall Composite PMI came below the 59 forecast, at 57.6.

Demand was hurt from the cost-of-living crisis and economic uncertainty due to the war in Ukraine. Consumer confidence is very important as the UK is essentially a services economy and the way consumers and businesses spend their capital affects economic growth. The GfK said their UK consumer confidence measure is now "in freefall as Index crashes in April to -38." Joe Staton, Client Strategy Director at GfK said: “The cost crunch is really hitting the pockets of UK consumers and the headline confidence score has dropped to a near historic low." 

Retail sales

Retail sales for April dropped below expectations at -1.4% month-on-month in March, below the -0.3% markets expected. The March fall marks the second month that retail sales declined and demonstrated that the wage squeeze is affecting consumer spending.

Chief UK Economist at Pantheon Macroeconomics Samuel Tombs said that low consumer confidence means that households will withdraw their savings cautiously, but looking ahead, retail sales volumes are expected to fall further as households struggle with their finances and inflation continues to rise.

 

 How will the data affect the Bank of England’s decision?

The gloomy data will force the Bank of England to consider how fast it will hike interest rates as it shows an economy under pressure. The pound will also come under pressure as markets begin to cut back their rate hike expectations. With Inflation at a 30-year high of 7% and even rising higher in April, the Bank will be unable to curb inflation, as global oil prices and geopolitics are external factors outside its control. While the Bank needs to act by increasing interest rates, Friday’s data has undermined the pound with UK economic growth slowing down and hurting consumer purchasing power.

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