The Pound to Dollar (GBP/USD) exchange rate fell to 7-month lows at 1.2475 before slightly recovering to above 1.2500. The Pound to Euro (GBP/EUR) also decreased, reaching 1.2040.
Since the Bank of England's recent meeting, GBP/USD has dropped approximately 150 pips, influenced by a hawkish Federal Open Market Committee (FOMC) meeting earlier this week. In contrast, EUR/GBP experienced a rally of about 80 pips, trading around 0.83. Analysts indicate that position adjustments and declining liquidity may lead to increased market volatility.
Recent UK economic data has not provided substantial support, raising concerns about growth. Equity market declines have further weakened the Pound, while the US Dollar remains resilient. MUFG forecasts a continued decline for GBP/USD in the coming months, although the US trade surplus with the UK could offer some protection.
UK retail sales volumes rose by 0.2% in November, following a 0.7% decline the previous month, and were below expectations of a 0.5% increase. Year-over-year sales increased by 0.5%, but overall volumes remain 1.6% lower than pre-COVID levels.
Neil Birrell, Chief Investment Officer at Premier Miton Investors, noted the economy's struggles, emphasizing that the Bank of England's decision to maintain interest rates amid inflation raises growth concerns as the year ends. The Christmas shopping period is expected to provide further insights into short-term economic prospects.
The UK government’s borrowing requirement decreased to £11.2 billion for November 2024, down from £14.6 billion the previous year, marking the lowest November deficit in three years. Central government tax receipts improved compared to last year, although increased public spending and benefits countered this growth.
Globally, attention turns to the potential for a US government shutdown, which could introduce additional market volatility. Following pressure from President-elect Trump, a proposed House spending bill was withdrawn. If no agreement is reached, the government is set to shut down on Saturday.
Short-term US rates saw a slight decline, while longer-term rates increased amid concerns over tax cuts and the potential removal of the debt ceiling, which could complicate fiscal plans.