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Pound Sterling's recovery against the Euro stumbled on news from Lloyds Bank that UK business sentiment slumped in April.
The Lloyds Business Barometer reported a 10 percentage point drop in business confidence between March and April to a three-month low of 39%. This marks the biggest drop since June 2022, with both the economic optimism and trading prospects subcomponents registering a decrease.
The findings come just days ahead of the May Bank of England decision and build the case for a 'dovish' turn in the Bank's guidance that risks a selloff in the Pound.
The Pound-to-Euro exchange rate has eased back to 1.1764 in the wake of the Barometer release, suggesting the recovery seen over recent days is set to retrace.
For now, the technicals don't suggest a major decline is imminent, and a move to 1.1836 is still a possibility in the coming days.
Sterling appears to have benefited of late from easing global equity market volatility, confirming global drivers are in charge.
However, those transacting in Euros and Sterling should be aware that domestic UK issues could soon start to have a greater bearing on the Pound as May kicks off, and here, the risks are to the downside.
The results from the Lloyds Business Barometer results show a combination of tariffs and higher business costs in the UK are weighing on businesses, also confirmed by last week's PMI survey for April which hinted that the economy might have gone into reverse.
The Bank of England will examine these surveys and consider whether it needs to accelerate the pace of its interest rate cuts to insure the economy against a deepening downturn.
In fact, money markets show investors see the chance of a sizeable 50 basis point cut next week as being around 20%.
A 25 basis point cut is the most likely outcome, but the Bank now has the ammunition to guide that it will cut again in June, meaning it would be stepping up the pace at which it cuts from quarterly to consecutive policy meetings.
The textbook says such a shift would weigh on the Pound.
Above: GBPEUR upside is waning.
However, the Bank still faces constraints as inflation is simply too high to allow the Bank to pursue a low interest rate policy again. Both the PMI and Lloyds Business Barometer reports reveal bubbling inflationary pressures.
Lloyds says April saw a surge in firms planning to raise prices, rising by 7 points to 68%.
This marks the largest month-on-month increase since September last year. It is also 8 points higher than a year ago. A record high of 70% (up from 63%) of firms indicated they intend to raise their prices in the next 12 months, while 2% (unchanged) expect to lower prices.
Andrew Sentance, former Bank of England Monetary Policy Committee member, says the Bank is instinctively prone to preferring lower interest rates, and next week it will likely signal it is ready to quicken the pace at which it cuts.
But, it risks a confidence crisis if it accelerates the pace it cuts just as inflationary pressures continue boil up again.
For the Pound, this offers the prospect of near-term volatility with limited upside.