Pound plummets as markets spooked by recession fears

Rising fears that rising interest rates could push the UK into recession put pressure on the pound last night.

The British pound fell as low as $1.2688 against the dollar before partially recovering to around $1.27 in a turbulent session as traders reacted to mixed economic data.

Retail sales were a bright spot, posting an unexpected 0.3 percent increase in May thanks to warm weather and the Coronation Bank Holiday.

But a closely monitored monthly business survey showed that growth cooled this month amid what was described as a “losing momentum for consumer spending.” Sterling reached a 14-month high of $1.2848 last week, but the outlook has since deteriorated.

Fiona Cincotta, market strategist at City Index, said the pound’s fall reflected fears of a recession.

“Normally, a major G10 central bank going for a massive rate hike would expect a jump in sterling. But the fact that it has come off is just a reflection of those fears,” she said.

Official figures released this week showed that inflation is difficult to tackle, while the precarious state of public finances suggests the government has little scope to help distressed consumers.

The Bank of England has responded to the inflation figures with a stronger-than-expected rate hike to 5 percent and financial markets expect to reach 6.25 percent early next year.

Fears of what that could mean for mortgage holders led Chancellor Jeremy Hunt yesterday to summon bank bosses where they agreed to offer more flexibility to borrowers.

There was hope, however, as previously released figures from the Office for National Statistics (ONS) suggested that consumers were weathering the cost of living so far.

They showed retail sales rose 0.3 percent in May compared to April, surprising economists who had forecast a 0.2 percent drop. Turnover was still 2.1 percent lower than in the same month last year.

But James Smith, developed markets economist at ING, said: “The worst is probably behind us for UK retailers.”

Heather Bovill, senior statistician at ONS, said online stores were doing “particularly well selling outdoor gear and summer clothing as the sun started shining.”

Garden centers and DIY stores were also boosted by the good weather, although food sales fell, partly due to a boost in takeaway orders and pub trips during the holiday season. Loose figures from data company GfK showed that consumer confidence has risen to the highest level in 17 months.

“Consumers are showing remarkable resilience in the face of inflation that is currently refusing to budge,” said Joe Staton, GfK’s Client Strategy Director.

In another set of economic data released yesterday, the Purchasing Managers Index (PMI) showed that private sector growth was cooling.

Chris Williamson, chief business economist at S&P Global Market Intelligence, who compiled the research, said it suggested the economy had lost momentum after a brief growth spurt in the spring and would weaken further in the coming months.

“Consumer spending on services, which was a major growth engine in the spring, is now showing signs of stagnation,” he said.

Elizabeth Martins, senior economist at HSBC, said it was “not a terrible data day” with the PMI numbers still pointing to growth and job creation in the economy. But it “could be one last hurrah before the slowdown hits.”

Martin Beck, chief economic adviser to the EY ITEM Club, said: ‘With inflation proving stubbornly stubborn and mortgage holders feeling the effects of higher interest rates, signs of weaker momentum in the latest PMIs may persist.

“However, falling energy prices are a major positive for activity and average predictions of a recession may be exaggerated.”