The pound has plummeted and has hit its lowest level against the US dollar since September 2020. The release of disappointing economic data, including weak retail sales in March and the cost-of-living crisis which has affected consumer spending are some of the reasons behind the sharp drop. Additionally, markets have already priced in interest rate hikes by the Fed which is offering support to the US dollar.

CBI’s industrial trends survey of UK factories

On Monday, the Confederation of British Industry’s (CBI) first quarterly industrial trends report since the war in Ukraine started, highlighted the pressures on UK factories from rising costs. UK manufacturers raised prices in order to cover surging raw material and energy costs, and a further acceleration is expected, according to the CBI. Average costs grew at the fastest rate since July 1975 and firms increased domestic prices at the fastest pace since October 1979, which will feed through to consumers.

UK manufacturing confidence was hit after the war in Ukraine and rising inflation. Both business sentiment and export optimism fell in April, as both commodity prices and uncertainty increased.

Companies reported that productivity and new orders slowed over the last quarter, and new orders are expected to continue to drop in the next quarter.

Anna Leach, CBI deputy chief economist, said that manufacturing orders and output have continued to grow, but the war in Ukraine has made things more difficult, especially following the pandemic, as costs have risen and concerns about the availability of raw materials have grown. She noted that is not surprising that sentiment has weakened in the last three months with manufacturers cutting back their investment plans.

UK economy slowing down

UK retail sales disappointed markets while UK consumer confidence fell to lows last seen during the time of the financial crisis in 2008. The potential slowing of economic activity weakened the pound and markets are beginning to realise that they have aggressively priced in too many rate hikes for 2022. Some analysts believe that investors should remain cautious about the pound as the Bank of England will be unable to keep pace with the aggressive tightening cycle priced in by the currency market. 

S&P Global's PMI data for April also showed a further slowing in growth rates as inflation surged.

Derek Halpenny, Head of Research, Global Markets, at MUF said: "Downside risks for the pound are building with a host of specific negative developments providing reason for GBP sentiment to worsen over the coming days and weeks.”

Economists at MUFG Bank, also noted that the GBP remains vulnerable due to the economic slowdown and unfavourable financial market conditions. They noted that the policy divergence between the BoE and Fed will be sharper in the coming months. As more economic data demonstrates that the UK economy is experiencing a slowdown, they expect the BoE to become more cautious about further rate hikes this year. On the other hand, the Fed is more determined to proceed to further rate hikes this year, as the US economy is less vulnerable.

 

 

They warned that the pound will remain more sensitive than the US dollar due to concerns about gloomy global financial conditions following aggressive policy tightening.

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