The Pound was on track for its largest two-day decline since late July on Friday, following a rise in UK public borrowing and a Bank of England rate decision that underscored the challenges policymakers face in managing both growth and inflation.
Official figures released on Friday revealed that public sector borrowing from April to August reached £83.8 billion, exceeding the Office for Budget Responsibility’s earlier forecast by £11.4 billion, Reuters reports.
The increase adds to the challenge Chancellor Rachel Reeves faces with her November budget, where she is already expected to introduce new tax measures to adhere to fiscal rules and maintain stability in financial markets.
The Pound has fallen on this data and is testing support at $1.35, making it the second-weakest performer among G10 currencies today.
Sterling dropped as much as 0.4% in early trading before recovering slightly to trade down 0.3% at $1.351. Over the past two days, it has fallen nearly 0.9%, marking its biggest two-day decline since 31st July.
Meanwhile, the Bank of England held interest rates steady on Thursday, as anticipated, and slowed the pace of its government bond sales to limit effects on the more volatile long-dated segment of the market.
With inflation hovering near twice the Bank of England’s 2% target, the central bank has limited room to cut rates further to support the economy, as signs of weakness in the labour market continue to grow.
UK government bond yields rose on Friday, with long-dated 30-year gilts climbing 4.3 basis points to 5.547%.
Data released on Friday indicated that retail sales in August exceeded expectations, boosted by sunny weather, although July’s sales growth was revised lower.
Several major retailers, including Primark owner Associated British Foods and budget supermarket Aldi UK, have expressed concerns about the future of consumer spending amid upcoming tax increases and a weakening labour market.
This latest economic setback adds to the challenges facing Chancellor Rachel Reeves. However, as seen yesterday, the Bank of England is reluctant to cut rates, with inflation running at nearly twice the official 2% target and expected to climb further.
The Pound also dropped sharply against the Yen, which rallied broadly after the Bank of Japan kept rates unchanged, though two unexpected dissenters voted for a hike.
The central bank also announced plans to begin selling riskier assets, hinting at an earlier-than-expected tapering of its monetary stimulus. Sterling fell 0.45% to 199.73 Yen.