Sterling slumps on safe-haven demand, weak UK data

"The Q1 data released yesterday painted a picture of a large current account deficit currency which may not be able to attract sufficient and stable forms of inward capital flow to cover that shortfall in this global environment," Stephen Gallo, European Head of FX Strategy at BMO Capital Markets, said. Higher prices forcing people to cut back on purchases, resulted in weaker-than-expected U.S. consumer spending data in May and stoked fears for a slowdown in the world's largest economy.

Sterling slumped on Friday against the dollar and was set for its worst week against the greenback in a year as renewed fears of a global recession coupled with weaker-than-expected UK manufacturing data knocked the British currency. After its biggest six-month decline since 2008 against the U.S. dollar, risk-sensitive sterling fell 1.38% to $1.2011 and 0.7% to 1.1554 Swiss francs, close to a more than two-year low against the Swiss currency touched earlier this week.

Sterling also fell against a weakening euro, down 0.7% against the single currency to 86.71 pence. It recorded its biggest half-year decline against the single currency since the start of the pandemic in 2020. "The pound is suffering on a fresh risk-averse backdrop on day one of the second half of this year, not just against the U.S. dollar but largely across the board," Neil Jones, Head of FX Sales Financial Institutions at Mizuho Bank, said.

"Demand destruction is kicking into the UK economy, expectations for further rate hikes are cooling whilst the Northern Ireland protocol continues to weigh," he said. Data on Friday showed British manufacturing lost more momentum in June than initially estimated as new orders contracted at the fastest rate in two years.

On Thursday, official data showed that Britain racked up a record shortfall in its current account in the first three months of this year, as the deficit ballooned to 51.7 billion pounds ($62.8 billion) or 8.3% of gross domestic product. "The Q1 data released yesterday painted a picture of a large current account deficit currency which may not be able to attract sufficient and stable forms of inward capital flow to cover that shortfall in this global environment," Stephen Gallo, European Head of FX Strategy at BMO Capital Markets, said.

Higher prices forcing people to cut back on purchases, resulted in weaker-than-expected U.S. consumer spending data in May and stoked fears for a slowdown in the world's largest economy. As a result of rising fears that the higher cost of borrowing would hurt further the UK economy, traders have scaled back some of their Bank of England rate hike expectations for the year.

The central bank began raising borrowing costs in December last year, increasing Bank Rate to 1.25% from a record low of 0.1% in an attempt to tackle inflation, which rose to a 40-year high of 9.1% in May. Potential trade clashes with the European Union were also been closely watched amid fears it could harm the sterling, analysts said.

Legislation, which would unilaterally allow Britain to scrap some of the rules on post-Brexit trade with Northern Ireland is due to be debated in the British parliament on July 13.