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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