Weekly Roundup: Pound struggles as UK recession fears intensify
Amy Richards January 30th 2023 - < 1 minute read
Sterling got off to a rocky start last week after the EY Item Club – an influential business consultancy – downgraded its forecasts for the UK economy in 2023. EY now expects GDP to shrink by 0.7% this year, more than double its previous estimate of a 0.3% contraction.
A deeper-than-forecast contraction in the UK services PMI added to recession fears, putting fresh pressure on the pound. British service sector activity dropped to a two-year low this month.
Despite these worries about the UK economy, GBP managed to pick up through the second part of the week. Increased expectations for another 50bps interest rate rise from the Bank of England (BoE) underpinned Sterling demand.
However, a downbeat retail balance from the Confederation of British Industry (CBI) and a lacklustre speech from the Chancellor Jeremy Hunt capped the pound’s recovery.
This week’s focus is the BoE rate decision on Thursday. Markets expect another half-point hike, so if the bank opts for a smaller rate rise then the pound could slump.
Even if the bank does raise rates by 50bps, there is speculation that it may signal an end to its tightening cycle. Such an event would also likely weigh heavily on Sterling.