The Pound has continued its descent this week as market risk sentiment sours and data points towards a slowdown in the UK economy.

Figures on Monday showed the UK economy contracted further in April (-0.3%), which was against expectations for a slight expansion (+0.1%), and industrial production data also showed weakness. Yesterday, unemployment data – an area which has shown resilience over the year – showed the jobless rate rising to 3.8% versus expectations for 3.6% (and against previous 3.7%). Together these figures may give the Bank of England further reason to be cautious over hiking interest rates too aggressively, which has reduced the appeal of Sterling. We see the conclusion of their latest interest rate meeting tomorrow afternoon, with market consensus expecting a small 0.25% hike. Investors will be closely watching how the policymakers vote and the latest forecasts for UK growth and inflation.

Market expectations for an aggressive 0.75% rate hike from the Federal Reserve tonight have dramatically ramped up since last Friday’s high US inflation reading. Even earlier this week the market was pricing in around a 25-30% chance but this is now almost fully priced in. This shift in expectations has made the USD more attractive to traders seeking higher yields but also to those seeking the safety of the Dollar, as concerns grow of global recessions caused by rising prices and aggressive rate hikes. With Fed expectations so high, it seems they would need to hike by 0.75% (or more) and be ultra-hawkish on top to keep the Dollar bulls satisfied. Anything less than 0.75%, or if their future rate hikes forecasts undershoot expectations, then we might see a dramatic correction.

As a result, the GBP/USD has hit below the 1.20 for the first time since the Covid-19 pandemic (March 2020). Since Friday’s US inflation data, the pound has lost around 3-cents against the US Dollar. The GBP/EUR has also succumbed to this latest round of Pound weakness and it’s down around 3 cents from last week’s high and trading around a 13-mth low. The EUR/USD is down over 3-cents from last week’s high and trading in the 1.04s which is a 4-week low.

Tonight’s Fed meeting should set up the direction of the GBP/USD for the week, although tomorrow’s BoE meeting could also throw in some additional volatility. UK politics is also being carefully followed with Brexit issues and a potential Scottish independence referendum seemingly back on the close agenda.