The British pound experienced a decline in its value, although it managed to stay above the lowest point reached in the past month. This drop followed the release of a survey revealing that British retailers had encountered their slowest sales growth in 11 months during July. The reasons cited for this sluggish performance were the persistent rainy weather and the elevated levels of inflation.

The British Retail Consortium (BRC) unveiled figures indicating that retail sales values had only risen by 1.5% when compared to the same period the previous year. This marked a significant drop from the average growth rate of 3.9% observed over the course of a year, and it was notably lower than the peak of 5.2% seen in February of the current year.

It’s important to note that the provided data does not account for inflation adjustments. Consequently, the minor increase in spending recorded for July actually translated to a decrease when viewed in terms of sales volumes.

In currency markets, the pound’s value against the US dollar declined by 0.2% to reach $1.2757. Similarly, the pound also experienced a 0.1% decrease against the euro, bringing it to a rate of 86.10 pence.

Despite the resilience displayed by British consumers thus far in the face of high inflation and rising interest rates, economists are expressing concerns that this steadfastness may dwindle in the upcoming months. The context reveals that wage growth, when adjusted for inflation, has turned negative. Additionally, consumers are increasingly relying on unsecured loans such as credit card debt. As borrowing rates, especially for mortgages, rise not only in response to past interest rate hikes but also in anticipation of future ones, consumers’ financial situations are expected to be strained.

CMC Markets’ Chief Markets Strategist, Michael Hewson, remarked that consumers appear to be adopting a more cautious spending approach, reserving their expenditures for necessities. He attributed this behavior to the ongoing impact of Bank of England rate hikes on income levels. Hewson pointed out that as fixed rate terms approach expiration, some consumers may be saving more to mitigate the forthcoming substantial rise in mortgage costs.

Huw Pill, Chief Economist of the Bank of England, mentioned that while food inflation has been notably higher than inflation in other categories, it is expected to decrease to around 10% later in the year, down from the current 17.3%.

Recent actions by the Bank of England included its 14th consecutive interest rate hike on August 2, along with an announcement that borrowing costs would remain elevated for a considerable period due to the persistence of inflation.

However, investor attention is now shifting towards the less favorable outlook for the UK economy. Money markets indicate that there is anticipation for at most two more rate hikes from the Bank of England. Notably, speculators have been reducing their optimistic positions on the pound for the second consecutive week, according to data from the Commodity Futures Trading Commission.

Conversely, asset managers have significantly reduced their long sterling positions, cutting them in half from a previous record high over the past week.

Economists at three prominent European banks, namely Barclays, BNP Paribas, and UBS, have revised their predictions regarding the peak level of UK interest rates. They now foresee one final rate hike from the Bank of England in September, potentially pushing its main rate to 5.50%.

Against this backdrop, the British pound has displayed a 4.4% increase against the US dollar throughout the year. However, it has experienced a decline in momentum after achieving a year-to-date gain of as much as 8.6% in July. In terms of 2023 performance, the Swiss franc has narrowly outperformed the pound, exhibiting a 5.4% gain against the dollar.

Francesco Pesole, a strategist at ING, predicted that the pound is likely to remain volatile and sensitive to incoming economic data. He emphasized that in the longer term, markets may be overestimating the tightening measures by the Bank of England. As a result, expectations may need to be adjusted downward, potentially leading to a climb in the EUR/GBP exchange rate to the range of 0.87 to 0.88.