The pound dropped on disappointing retail sales data, the prelude to a significant day for sterling as investors pore over the impact of the currency’s devaluation and Brexit uncertainty on the UK economy.
Sterling dropped half a per cent to $1.2690 amid ongoing worries of a slowdown in consumer spending. After rising 2.2 per cent in April — an increase influenced by the timing of Easter — retail sales fell 1.6 per cent in May by more than expected.
Worries about UK growth prompted a sharp decline in the FTSE 250, which fell 1.3 per cent on Thursday — the mid-cap stock index is on track for its worst day of the year so far.
The FTSE 250 is more exposed to a domestic economic slowdown than the blue-chip FTSE 100, which is dominated by multinational companies that generate more of their revenues overseas.
“The squeeze on real wage growth suggests that the UK consumer is likely to be hobbled for some time and this could weigh on sterling in the long term,” said Kathleen Brooks at City Index.
The pound has been turbulent since last week’s election delivered a hung parliament, sliding from close to $1.30 before the vote to $1.2632 on Friday, before rallying on hopes that the election outcome had made a soft Brexit more likely.
A mixture of poor data and a hawkish Federal Reserve, which raised rates on Wednesday, is again weighing on sterling, and analysts expect further volatility on Thursday as the Bank of England meets and chancellor Philip Hammond delivers his annual Mansion House speech.
“There has been speculation in the build up that chancellor Hammond could speak out against weakened prime minister May’s plans for Brexit, by putting forward the case for a softer Brexit with a lengthy transitional arrangement which could provide more support for the pound,” said MUFG currency analyst Lee Hardman.
The market will also be waiting to see if Mr Hammond talks about loosening the fiscal reins, Mr Hardman added.
The fluid political situation in Westminster leaves the pound vulnerable ahead of the scheduled start of talks with the EU next week.
Irrespective of the BoE’s views on the economy, “sterling remains at the mercy of future Brexit negotiations [which] are likely to be postponed due to the difficulties of forming a government”, said Commerzbank strategist Ulrich Leuchtmann. “The BoE’s job is definitely not going to get any easier in the foreseeable future.”