The pound sterling hit a 12-week low against the US dollar on Tuesday on the back of disappointing UK economic data.
At the time of writing, the pound to dollar exchange rate (GBPUSD=X) was trading close to levels not seen since 13 June at 1.25, meaning £1 will get you $1.25. On 14 July, the rate was at 1.31.
It comes after the UK S&P Global/CIPS composite Purchasing Managers’ Index (PMI) dropped to 48.6 in August from 50.8 in July, the lowest since January.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said to Yahoo Finance UK: “The ratcheting up in interest rates is now making its mark on the services sector which until now has been more resilient to the attempts to squeeze down on demand to drive down prices.
“The closely watched S&P Global/CIPS UK Services PMI showed a contraction in August, indicating confidence is evaporating among companies and consumers. Data out today from Barclaycard also indicated that spending during the month dropped markedly compared to July, particularly across the hospitality sector as people turned more cautious.”
As a result, she said, the data builds on the picture of a slowing economy and is helping to reinforce bets that interest rates won’t go as high as the market had been predicting just weeks ago which is why sterling has dropped sharply against the dollar today to levels not seen since early June.
The data followed an update on UK retail prices this morning from the British Retail Consortium (BRC) with the sector witnessing a 4.1% increase in August, compared with a growth of 1.0% in August 2022, suggesting inflation is easing.
The Bank of England (BoE), which has raised its key interest rate 14 consecutive times to 5.25%, was expected to go ahead with a 25 basis point rate hike this month.
One of the bank’s chief economists reiterated this expectation last week when he acknowledged persistently high inflation and vowed the bank will bring inflation down.
The BoE will be meeting the same week as the US Federal Reserve, which investors will be keeping across to see how the GBP/USD develops.
The dollar index, meanwhile, which measures the US currency against six peers including the pound and euro, was up 0.4% at 104.61. It got a boost following weak activity data from China and Europe.