The pound fell against a strengthening US dollar on Friday, reversing gains made a day earlier following the Bank of England’s decision to hike interest rates to a 13-year high.
Sterling slumped as much as 0.5 per cent against the dollar to $1.2290, from a week-high of $1.2405 touched on Thursday.
Against the euro, the pound was flat at 85.46 pence in early trading on Friday, regaining some ground after losing about 0.3 per cent.
The dollar index, which measures the currency against six peers including the yen, rose 0.23 per cent to 104.12.
"It's very much a dollar move," said Michael Hewson, chief market analyst at CMC Markets, of sterling's performance on Friday.
At the beginning of the year the GDP/USD exchange rate was trading at about $1.3532 and €1.1897 against the euro.
The Bank of England will need to unleash a series of interest rate hikes that take borrowing costs to 3 per cent by the end of the year, according to financial market bets that suggests policymakers have lost control of inflation.
Still, the pound is the fourth-worst performing major currency this year. It has weakened 8.6 per cent in 2022.
The pound’s drop on Friday came after it gained 1.4 per cent versus the dollar on Thursday, buoyed by the BoE’s 0.25 per cent interest rate rise to 1.25 per cent — the highest level since January 2009.
The Bank’s decision is part of a global trend, which has seen more than 50 central banks around the world raise interest rates by at least a half point in one go since the start of the year.
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The BoE’s announcement came as a shock to some investors who had expected a more aggressive increase to douse rocketing inflation in Britain, but most predicted the regulator’s monetary policy committee (MPC) would support the pound with further rate hikes likely through the year.
"The BoE's (comparatively low) 25 basis point speed is in principle not a GBP disadvantage," analysts at Commerzbank wrote in a note. "Because it formulated its will to hike further yesterday in a marginally more convincing manner, the pound was able to rise correctly."
The pound on Tuesday plummeted to its lowest level against the dollar since the beginning of the Covid-19 pandemic. It dropped by more than a cent against the dollar to trade below $1.20 on foreign exchange markets for the first time since March 2020.
The fall came amid heightening concern over the health of the British economy.
Rising food and energy prices have pushed inflation to a 40-year high, with consumer prices index (CPI) inflation hitting 9 per cent in April. Further increases expected later in the year.
The BoE on Thursday raised its forecast for the peak of inflation this year to “slightly above” 11 per cent, reflecting the planned increase in the energy price cap in October, and said it now expects the economy to contract in the current quarter.
UK stocks rose on Friday, with miner Glencore and media company Future gaining on strong outlook, although worries about sluggish economic growth put the main indexes on course for their third straight week of fall.
The FTSE 100 index was up 0.6 per cent by 8.18am GMT (9.18am UK time) in choppy trading. Shares of Glencore jumped 3.4 per cent to the top of index after forecasting more than $3.2 billion (£2.60bn) in half-year adjusted operating profit for its trading division.
Spirits maker Diageo provided the second-biggest boost to the index with a 2.6 per cent rise.
The domestically focused mid-cap FTSE 250 index advanced 1.2 per cent, powered by a 5.4 per cent surge in shares of Future after the company reaffirmed it is on track to achieve full-year 2022 guidance.
Both the indexes slumped more than 3 per cent on Thursday on the back of the BoE’s interest rate hike.
Purse-pinched Britons cut out luxuries
Shoppers in the UK are restraining themselves from splashing out on luxuries and their preferred items, supermarket giant Tesco said on Friday, as the cost of living bites.
Britons are buying less, switching to cheaper products and shopping more often as they try to cope with soaring inflation, the firm said, describing the market environment as "incredibly challenging".
Pessimism weighing on Britain's households has hit unprecedented levels, as wages struggle to keep pace with inflation. Food inflation is predicted to hit 15 per cent this summer.
"We are seeing higher frequency shopping trips, so there's an elevation in the number of shopping trips, we are seeing basket sizes coming down a little bit," Tesco chief executive Ken Murphy told reporters after the group reported a fall in underlying UK sales in its latest quarter.
Britain's biggest retailer, which has a more than 27 per cent share of the UK's grocery market, said it was also seeing early signs of customers opting for cheaper products in areas of significant inflation.
"Those staples like pasta, bread and beans is where we're seeing customers choose to trade down to the entry level or the core own brand level product," he said.
He highlighted Tesco's convenience store business as trading well in the crisis.
Tesco and Britain's second largest grocer Sainsbury’s have previously warned of a hit to profits this year as they pump cash into keeping prices down in a bid to convince customers not to switch to German-owned discount stores Aldi and Lidl.
Tesco maintained its full-year profit guidance despite reporting a 1.5 per cent drop in underlying UK sales over its first quarter to May 28, broadly in line with analysts' forecasts. They had fallen 1.2 per cent in the previous quarter.
Mr Murphy vowed to work with suppliers to mitigate the impact of inflation as much as possible and support customers who are facing the most difficult economic conditions in decades.
