The British pound (GBP) experienced a significant drop, reaching a 10-week low on Friday. This decline came as investors adjusted their expectations regarding the Bank of England’s interest rate following recent sluggish activity data.
S&P Global’s flash Purchasing Managers’ Index (PMI) for August, released on Wednesday, revealed a contraction in business activity. This contraction indicated that the UK economy was on track to shrink in the third quarter, prompting investors to scale back their expectations for tightening measures.
As a result, the pound declined by 0.1% to $1.2591, hitting its lowest level since June 13 at $1.2560. The euro also experienced a 0.1% decline, standing at 85.72 pence.
Concerns have arisen over the UK economy’s health and recession fears due to weaker-than-forecasted retail sales and dismal PMI data. Fiona Cincotta, a financial market analyst at City Index, stated, “Weaker than-forecast retail sales last week and dismal PMI this week have raised concerns over the health of the UK economy and recession fears”.
Meanwhile, the US Dollar (USD) exhibited strength against multiple currencies, including the yen and euro, in anticipation of speeches by Federal Reserve Chair Jerome Powell and European Central Bank President Christine Lagarde at the Jackson Hole Symposium.
BoE Governor Andrew Bailey chose not to attend the event, with Deputy Governor Ben Broadbent representing the central bank. However, the market will need to wait until Monday to observe any potential impact on sterling as Broadbent’s remarks are scheduled for the following day.
The recent volatility in BoE peak rate expectations, particularly in response to data releases, indicates that the return of BoE comments after a period of silence can significantly impact the market. While markets still anticipate a 15th straight interest rate hike by the BoE in September, the likelihood of peak rates reaching 6% is diminishing, with only around 60 basis points of tightening priced.
Jeremy Stretch, CIBC Capital Markets head of G10 FX strategy, suggests that sterling may fall towards the $1.2470 region in the coming weeks, as there has been a reduction in expectations for terminal rates.
In other news, data released shows that British consumers’ mood improved in August due to lower inflation, resulting in less pessimism regarding personal finances. However, overall sentiment remains fragile.