Sterling edges back towards June 2020 low

By Samuel Indyk

LONDON (Reuters) -The British pound edged lower on Tuesday, heading back towards its lowest level in nearly two years on signs that a weakening economy will force the Bank of England to slow its interest-rate hiking cycle.

At 1503 GMT, the pound was 0.2% lower against the U.S. dollar at $1.2305, just above its lowest level since June 2020 of $1.2262 reached on Monday.

"I think it's pretty tough to be bullish sterling in the current environment," said Michael Brown, head of market intelligence at Caxton, citing a dovish BoE, rapidly slowing growth and high inflation.

"If you're asking for a perfect mix for a weaker currency, sterling is pretty much as close as you can get to at the moment," Brown added.

On Thursday, the BoE raised its benchmark interest rate to 1.0% but said it saw the economy shrinking in 2023 and a near 1% fall in gross domestic product in the final quarter of 2022.

Markets are currently pricing in a further 106 basis points of tightening from the BoE this year, taking the benchmark rate to just above 2.0%.

Further evidence of the worsening growth outlook was seen on Tuesday after two reports showed British consumer spending stuttered in April as the cost-of-living crisis affects consumption.

The British Retail Consortium said total retail spending among its members - mostly large chains and supermarkets - was 0.3% lower in April than a year earlier, the first fall since January 2021 when the country was under a COVID lockdown.

Data from payment processor Barclaycard, covering a broader range of spending, showed outlays on essential items grew by slightly less in April than in March.

Focus turned to the British government's plans for the new session of parliament, where Prime Minister Boris Johnson said his Conservative government would "deliver on the promises we made" in the 2019 election.

Analysts said the main focus would be on what the government said about the Northern Ireland Protocol which governs post-Brexit trade between the province and the rest of the United Kingdom.

Johnson's government urged the European Union to show new imagination in talks to resolve problems with post-Brexit trading rules, adding that it would take all necessary steps to protect peace in Northern Ireland.

"I think that the best case resolution for the pound is a sort of classic EU style fudge," Brown said.

"Whether we get that remains to be seen but definitely another risk to add into that mix that we've already got."

Against the euro, sterling was little changed at 85.60 pence, near its lowest level since December.

(Reporting by Samuel Indyk; editing by Dhara Ranasinghe, Emelia Sithole-Matarise, William Maclean)