Sterling lost around half a cent against the euro over the course of yesterday and remains close to its lowest point since last December.
Although GDP fell by 0.3% in April – a considerably bigger fall than expected – the ONS revealed that a large part of that decline was simply the end of the government’s Test and Trace scheme. This news settled the market’s nerves and meant the fall was smaller than perhaps it could have been.
Against the US dollar the picture was much worse, with sterling falling back to its lowest point since March 2020 and the very start of the pandemic. The US dollar’s strength has come from expectations of a strong increase in interest rates from the Federal Reserve tomorrow following Friday’s inflation data.
For sterling, it’s been a week where politics and economics have both weighed on the pound.
Politically, the UK government’s sabre-rattling with the EU over the Northern Ireland protocols, with the risk of a trade war, has unnerved the markets. This has combined with poor recent economic data and high inflation, leaving the Bank of England with limited options for Thursday’s interest rate decision. The markets are betting on the Bank taking a dovish stance.
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