The British pound drifted slightly lower on Friday as investors flocked to the dollar amid uncertainty surrounding U.S.-Iran peace talks. Market participants were also digesting weak domestic spending data, with UK retail sales volumes dropping 1.3% month-on-month in April - the steepest monthly fall in nearly a year.
Economists had been forecasting a 0.6% decline, meaning the actual fall more than doubled expectations. The data indicated consumers cut back particularly on fuel purchases and discretionary items, a behaviour the report attributed to pressure from rising energy bills and uncertainty tied to the Iran conflict.
Sterling was largely unchanged against the dollar at about $1.3434 on Friday, but remained positioned to record a weekly gain of roughly 0.8%. The currency has also recovered some ground following a recent political crisis in Britain, during which Prime Minister Keir Starmer faced calls to resign after his Labour party incurred substantial losses in local elections.
UBS strategist Constantin Bolz said: "We believe the worst of the political uncertainty is likely behind us as far as sterling is concerned." Against the euro, the pound was stronger this week, gaining nearly 1%. On Friday the EUR/GBP rate was quoted at 0.8644 pounds, down 0.1% on the day.
Bolz added: "We continue to view sterling as undervalued and under-owned, and expect a rebound in the coming months, particularly as political uncertainty fades."
In a separate fiscal update, Britain's public finances showed a sizeable shortfall in April - the largest since the COVID-19 pandemic. Borrowing in the month reached 24.3 billion pounds, which is 25% higher than the same month a year earlier and represents the second-highest April borrowing total on record.
The combination of weaker retail volumes, pressure on household budgets from energy costs, and a marked rise in government borrowing presents a mixed picture for markets and policymakers. Currency traders balanced near-term safe-haven flows into the dollar against signs of sterling resilience following political turbulence.
Market snapshots:
- Retail sales volumes: -1.3% month-on-month in April (steepest drop in nearly a year).
- Economists' forecast: -0.6% for retail sales in April.
- Sterling vs USD: around $1.3434; on track for a ~0.8% weekly gain.
- EUR/GBP: 0.8644 pounds, down 0.1% on Friday; pound up nearly 1% over the week.
- UK borrowing in April: 24.3 billion pounds, 25% higher than April last year; second-highest April borrowing on record.