Pound softens as UK consumers cut spending, public finances worsen

The pound edged lower on Friday as uncertainty over the status of peace talks between the U.S. and Iran prompted investors to buy the dollar and after UK data for April showed retail sales ‌fell by the most in nearly a year and Britain's public finances deteriorated sharply. This week has brought mixed economic data, including a monthly report on the labour market that showed unemployment is on the rise and real pay growth is barely positive, given the impact of inflation stemming from the ‌Iran war.

Friday's retail sales data showed sales volumes fell 1.3% month-on-month in April, the steepest drop in nearly a year and more than ‌double the 0.6% decline economists had expected. Consumers are cutting back on fuel purchases and discretionary spending, as they contend with soaring energy bills and uncertainty over the war. "The soaring price at the pump has put pressure on households still fighting back from their last brush with scorching inflation," Danni Hewson, AJ Bell's head of financial analysis, said.

"Initially, motorists rushed ⁠to fill ​up as the impact of the Iran ⁠war sent fuel prices higher, but as it became clear this was not going to be a short-lived spike, people have regulated their behaviour. Non-essential journeys have been pared ⁠back as consumers once again think hard about how they're going to spend every penny," she said. The pound was down 0.1% against the dollar on Friday to around $1.3420, ​but still set for a 0.7% gain this week. Sterling has shaken off some of the weakness triggered by a political crisis ⁠in Britain, where Prime Minister Keir Starmer is under pressure to quit following heavy losses for his ruling Labour party in local elections. Against the euro, the pound has performed more robustly, ⁠having ​gained nearly 1% this week. On Friday, the euro was roughly flat at 0.8646 pounds. A separate report on Friday showed Britain's public finances had the biggest shortfall since the COVID-19 pandemic in April in what could be an early taste of the budget hit facing finance minister ⁠Rachel Reeves caused by the Iran war.

Borrowing during the month was 25% higher than in April last year at 24.3 billion pounds ($32.63 billion), ⁠the second-highest borrowing for April on ⁠record, according to the report. A Reuters poll of economists had pointed to a 20.9 billion-pound deficit in April, the first month of the financial year.

"This provides an early sign of the deterioration in the public finances ‌that is inevitable over ‌the coming quarters," Ruth Gregory, deputy chief UK economist at Capital Economics, said. (Reporting ​by Amanda Cooper; Editing by Emelia Sithole-Matarise)

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