Pound extends falls as data shows huge GDP contraction, wide deficit

LONDON: Sterling retreated against a broadly firmer dollar on Tuesday, as investors awaited confirmation of the government’s spending plans to lift an economy that posted its biggest contraction in 40 years in early-2020. The pound is already under pressure from fears that Britain will fail to clinch a trade deal with the European Union by the end-2020 deadline. Tuesday is the last day it can request an extension to the transition period, but it has refused to do so.
Meanwhile Britain’s economy shrank by the most since 1979 in the first 2020 quarter as households slashed their spending, according to official data that included the first few days of the novel coronavirus lockdown. Gross domestic product dropped by a quarterly 2.2%, below the 2% median forecast in a Reuters poll of economists. In the first six months of the year. Britain’s economy may have contracted by 20%, the Bank of England has warned.
Another worrying sign is the balance of payments deficit which widened to 21.1 billion pounds in the first quarter, versus a forecast of 15.4 billion pounds.
“The pound is on track to be the worst-performing G10 currency this month for the second consecutive month,” Lee Hardman, a currency strategist at MUFG in London, told Reuters.
“The weakness we are seeing now is a trend that has been in place for some time.”
The pound hovered around one-month lows hit on Monday against the dollar, slipping 0.15% at $1.2269 at 0830 GMT and held above three-month lows against the euro at 91.34 pence, down by a similar amount.
The currency has fallen more than 7% so far this year against the dollar.
Prime Minister Boris Johnson is set to announce a plan promising to fast-track 5 billion pounds ($6.13 billion) of infrastructure investment after Chancellor Rishi Sunak is expected to follow the accelerated infrastructure spending plan with a budget statement next week.
“The economy was slowing even before the March lockdown, largely due to widespread flooding in February, which not only hit consumer spending, but also the wider economy in general,” CMC Markets analysts said in a note on Tuesday.
Investors remain wary of the risk of a second wave of coronavirus infections, pubs, restaurants and bars set to reopen from July 4. The city of Leicester is again under stringent lockdown following a surge in new cases.