Growing concerns that rising interest rates could push the UK into recession put stress on the pound last night.
The British pound fell to just $1.2688 against the greenback before partially recovering to $1.27 in a choppy session as traders reacted to mixed financials.
Gross retail sales have been bright, rising sharply by 0.3% in May due to hot weather and the coronation holiday.
But a closely watched monthly business survey confirmed that developments cooled this month amid what was described as a “loss of momentum in consumer spending”. Sterling hit a 14-month high of $1.2848 last week, but the outlook has since worsened.
Fiona Cincotta, market strategist at City Index, said the fall in the pound reflected fears of a recession.
“Normally, a major G10 central bank gearing up for a massive rate hike would expect a jump in sterling. But the fact that it has disappeared is just a reflection of those fears,” she said.
Official data released this week confirmed that inflation is difficult to solve, while the fragile state of public finances suggests that the federal government has little room to help struggling shoppers.
The Bank of England has responded to inflation figures with a sharper-than-expected rise in prices to five percent, with money markets expecting it to hit 6.25 percent at the start of the next 12 months.
Concerns about what this could mean for mortgage holders led Chancellor Jeremy Hunt to summon the chief executives of financial institutions yesterday where they agreed to give borrowers extra flexibility.
There was hope, however, with previously released data from the Office for National Statistics (ONS) showing that customers have so far held up on house prices.
They confirmed that gross retail sales rose 0.3% in May from April, beating economists who had forecast a 0.2% drop. However, the turnover was 2.1% lower than the identical month in the last 12 months.
But James Smith, ING’s developed markets economist, said: “The worst is probably behind us for UK retailers.”
Heather Bovill, senior statistician at the ONS, said online stores had done “particularly well selling outdoor gear and summer clothing when the sun started to shine”.
The great weather has also boosted garden equipment and DIY stores, although gross meal sales have fallen, partly due to an increase in takeaway orders and pub trips throughout the holiday season. Weak figures from knowledge firm GfK confirmed that customer confidence had risen to its best level in 17 months.
“Consumers are showing remarkable resilience in the face of inflation, which is currently refusing to abate,” said Joe Staton, director of client strategy at GfK.
In another piece of financial intelligence released yesterday, the Purchasing Managers’ Index (PMI) confirmed that growth in the private sector is cooling.
Chris Williamson, chief business economist at S&P Global Market Intelligence, which prepared the analysis, said it indicated the economic system was out of whack after a brief spurt in the spring and would deteriorate further in the coming months.
“Consumer spending on services, which was the main driver of growth in the spring, is now showing signs of stagnation,” he said.
Elizabeth Martins, HSBC’s senior economist, said it was not a “terrible day of data” but the PMI numbers did point to growth and job creation in the economy. But it “could be the last hurray before the slowdown begins.”
Martin Beck, Chief Financial Adviser at EY ITEM Club, said: “With inflation stubbornly under pressure and mortgage holders feeling the effects of higher interest rates, the latest PMI may continue to show a weaker pace.
“However, the decline in energy prices is the main positive factor for activity, and average forecasts for a recession may be overstated.”