Pound drops to 10-month low after disappointing week of data

Sterling was sent slipping and sliding to below $1.30 for the first time in 10 months after a series of disappointing economic data points this week lowered expectations for UK interest rates.

The pound briefly fell to $1.2996 on Thursday morning, down 0.6% against the dollar on the day, after the release of disappointing high street sales figures for June from the Office for National Statistics.

This came the day after consumer price inflation was shown to have also fallen short of expectations and slowing pay growth numbers at the start of the week.

However, money markets are still pricing in an interest rate hike in August's Bank of England monetary policy committee meeting, though the odds have dipped to 68% on Thursday from 84% on Tuesday.

BoE Governor Mark Carney said earlier this month that the UK economy was bouncing back from a slump in the first quarter, with data for the first two months of the second quarter showing the economy was developing as the BoE expected.

In a speech at a business summit in Newcastle, Carney said: "Domestically, the incoming data have given me greater confidence that the softness of UK activity in the first quarter was largely due to the weather, not the economic climate. A number of indicators of household spending and sentiment have bounced back strongly from what increasingly appears to have been erratic weakness in Q1."

However the weak June data this week is clearly not the platform the central bankers were hoping for when preparing investors for a rate hike, said market analyst Craig Erlam at Oanda. With Brexit developments hardly progressing smoothly, he said this may suggest it would make more sense to hold off until November, even if this would be likely to result in another backlash against the policy of forward guidance.

"While holding off would make sense, there is clearly a view in the markets that this will not happen and the central bank may stick to plans to hike in two weeks... It seems traders are awaiting any hint from the BoE that plans have been put on hold again, at which point the resilience will likely break and possibly aggressively."

Although retail sales figures can be volatile, Kathleen Brooks, research director at Capital Index, said there is a "growing sense that the UK economy is slowing down sharply, and with the political backdrop deteriorating, the Bank of England needs to have a pretty solid reason for hiking rates when it meets next month".

She added: "We believe that on balance the BOE will continue to hike next month, even with Mark Carney’s capricious history of saying one thing and voting another way at the last minute. However, the risk is rising that the BOE could surprise the market and fail to hike in August, which is now the biggest risk for sterling – even more so than warring MPs in Westminster."

Economist Ruth Gregory at Capital Economics noted that over the second quarter as a whole, UK retail sales were up by a whopping 2.1% on the quarter, the biggest rise in fourteen years and felt June's numbers were affected by one-off factors that only temporarily stalled a recovery in the consumer sector. She remained confident an August interest rate hike is "more likely than not".

A strong retail performance in the first two months of second quarter still supports the case for the Bank of England to raise rates, said economist Howard Archer of the EY Item Club, adding that he believed the odds are "modestly in favour" of an August interest rate hike.