Sterling weakens further after retail sales

The British pound fell to $1.347 on Tuesday, retreating further from its recent two-week high of $1.358, as the latest batch of UK economic data shifted investor focus away from inflation concerns toward growing signs of economic softness.

June retail sales rose by just 0.9% month-over-month, rebounding only partially from the sharp 2.8% plunge in May—which itself was revised even lower—highlighting the fragile state of consumer demand. Excluding volatile components like autos and fuel, core retail sales increased by just 0.6%, falling short of the 1.2% forecast and reinforcing concerns over the sustainability of household spending.

While warmer weather supported food and beverage sales, the overall recovery in consumer activity remained tepid, adding to a string of lackluster economic indicators. Earlier this week, the UK’s composite PMI for July came in below expectations, with both the services and manufacturing components weakening, pointing to sluggish private sector growth.

Together, these figures are leading markets to reassess the outlook for monetary policy, as signs mount that inflation is no longer the sole challenge confronting the Bank of England.

In response, investors have begun pricing in a shift toward more dovish policy. Markets now see a 25 basis point rate cut as likely at the Bank of England’s August meeting, with rising odds of a second reduction before the end of the year.

BoE officials have recently indicated that they remain data-dependent, but analysts note that the central bank may soon be forced to prioritize economic stabilization over lingering inflationary pressures, particularly with wage growth showing signs of slowing and business investment subdued.

Meanwhile, the US dollar regained strength, buoyed by reduced expectations of imminent Federal Reserve rate cuts. Comments from President Trump earlier this week downplaying the need to replace Fed Chair Jerome Powell helped reinforce the perception that monetary policy in the US is on a more stable footing for now. Additionally, recent US economic data—including stronger-than-expected durable goods orders—has further supported the greenback by diminishing the urgency for Fed easing.

In the euro area, a relatively hawkish tone from the European Central Bank has also reshaped interest rate expectations, with traders scaling back bets on additional cuts this year. While inflation remains near the ECB’s 2% target, policymakers have signaled a willingness to pause and assess the impact of previous policy moves before making further adjustments.

Taken together, diverging policy paths among major central banks and persistent growth concerns in the UK have weighed on the pound, which remains vulnerable to further downside if upcoming GDP or labor market data disappoints. Investors will closely watch next week’s BoE meeting, where forward guidance will be critical in shaping expectations for the rest of the year.