The pound stumbled early last week as both credit card borrowing and mortgage approvals declined – further signs that the UK economy is slowing.
Mixed UK manufacturing data then saw Sterling waver. The final manufacturing PMI beat preliminary estimates but still showed a deepening contraction in British factory activity.
Midweek, new data from the British Retail Consortium (BRC) showed that UK food inflation hit a record high of 11.6% in October. Fears that the soaring cost of living will trigger a sharp economic downturn dented the pound.
These worries were confirmed by the Bank of England on Thursday. The bank said that the UK has already entered a recession, which it expects to last for two years. Although the BoE raised rates by a huge 75bps, it signalled a slower pace of tightening to come. This weighed on GBP exchange rates through to the end of the week.
So far this week, Sterling has quickly recouped some losses as investors buy the dip. However, there may be trouble ahead.
Data is fairly thin through most of the week, aside from speeches by BoE policymakers Huw Pill and Silvana Tenreyro. If they express concern over the UK economy and advocate a slower pace of rate rises, GBP could fall.
The real threat is on Friday, however, with the release of UK GDP. Economists expect a third-quarter contraction of 0.5%, which would support the BoE’s dire assessment of the UK economy.
