Sterling steadies near June 2020 low

The British pound was little changed on Tuesday, pausing after a slide to its lowest levels in nearly two years on signs that a weakening economy will force the Bank of England to slow its interest-rate hiking cycle. At 0825 GMT, the pound was flat against the US dollar at $1.2328, just above its lowest level since June 2020 of $1.2262 reached on Monday. Against the euro, sterling was little changed at 85.75 pence, near its lowest since December.

“The pound is finally finding some stability after a rough couple of weeks,” ING analysts said in a note. “Some stabilisation in sentiment should offer additional support today, and possibly help a return to the 1.2500 mark in sterling/dollar.” On Thursday, the BoE raised its benchmark interest rate to 1.0% but said it saw the economy shrinking in 2023 and a near 1% fall in gross domestic product in the final quarter of 2022.

Markets are currently pricing in a further 110 basis points of tightening from the BoE this year, taking the benchmark rate to just above 2.0%. Further evidence of the worsening growth outlook was seen on Tuesday after two reports showed British consumer spending stuttered in April as the cost-of-living crisis affects consumption. Sterling drops back towards 21-month lows before BoE decision

The British Retail Consortium said total retail spending among its members - mostly large chains and supermarkets was 0.3% lower in April than a year earlier, the first fall since January 2021 when the country was under a COVID lockdown. Data from payment processor Barclaycard, covering a broader range of spending, showed outlays on essential items grew by slightly less in April than in March. Focus was expected to turn to the British government’s plans for the new session of parliament, expected to be outlined later in the day.

Analysts said the main focus would be on what the government says about the Northern Ireland Protocol, which governs post-Brexit trade between the province and the rest of the United Kingdom. Any signs in the agenda that the government was introducing legislation that overrides some elements of the protocol, would be negative for sterling, RBC Capital Markets said.

Meanwhile, Lack of clarity on foreign exchange inflow, and a stronger US dollar pushed Pakistan's rupee to its alltime low in the inter-bank market after a fourth successive session of losses on Tuesday. As per the State Bank of Pakistan (SBP), the rupee closed at 188.66 after a day-onday fall of Rs1.13, or 0.60%. On Monday, the rupee had closed at 187.53 after a depreciation of 0.48%.

The rupee's weakest closing prior to Tuesday was 188.18 on April 7, 2022. Oil prices, a key determinant of currency parity, fell in volatile trade on Tuesday as the market balanced impending European Union sanctions on Russian oil with demand concerns related to coronavirus lockdowns in China, a strong dollar and growing recession risks.

However, despite the fall, the commodity remains well above $100 per barrel, a high level for oil-importing countries like Pakistan, which is already facing a widening current account deficit and depletion in foreign exchange reserves. Pakistan's trade deficit has also widened 64.79% during the first 10 months (JulyApril) of the current fiscal year, amounting to a massive $39.3 billion compared to $23.8 billion during the same period of 2020-21. Imports increased 46.4% to $65.492 billion, while exports, up 25.5%, clocked in at $26.2 billion during the period.

A widening trade deficit has put pressure on the country's foreign exchange reserves as well, with the centralbank held level falling to below two months of import cover. Pakistan is currently relying on inflow under its Extended Fund Facility (EFF) of the International Monetary Fund (IMF), hoping to convince the lender of releasing its next tranche to boost foreign currency reserves. At the same time, Islamabad is in talks with friendly countries, hoping for a loan-rollover from China as well.

EFF’s 7th review: IMF says expecting to field mission this month “The main issue is the payments' pressure, which has added to woes of the already-struggling local currency,” Zafar Paracha, General Secretary at the Exchange Companies Association of Pakistan (ECAP),.