The pound fell below $1.29 for the first time since November 2020 to a low of $1.2858. Sterling was last down 1.2% on the day and set for its biggest one-day fall in two months.
Against the euro, sterling fell to its weakest since April 4, and was last down over 1% at 84.03 pence per euro, set for its worst day against the single currency in seven months.
British retail sales fell 1.4% in March from February, much more than the 0.3% drop forecast in a Reuters poll.
British consumer sentiment too dropped to its second lowest reading since records began nearly 50 years ago, as the worsening cost of living crisis hurt households’ confidence.
Rounding off the weak data was a survey that showed the private sector also suffered a sharp slowdown this month as high inflation and war in Ukraine weighed on the country’s giant services sector.
“The cost-of-living crisis has arrived,” said Craig Erlam, senior market analyst at OANDA, who highlighted the weak data for Friday’s fall in sterling.
Comments from Bank of England Governor Andrew Bailey and external policymaker Catherine Mann on Thursday added to pressure on the pound.
Bailey said the central bank was walking a tight line between tackling inflation and avoiding a recession, while Mann highlighted the cost of living squeeze.
“Mann’s comments yesterday about a drag in consumption being a “circuit-breaker” for inflation expectations rising further has rung true today for markets after the substantial decline in retail sales data,” said Simon Harvey, head of currency analysis at Monex Europe.
The retail sales decline may foreshadow a greater consumption collapse later in the year, he warned.
But the data did not erode bets on an aggressive BoE monetary tightening cycle, with money markets still pricing in a further 160 basis points worth of rate hikes this year.
“The FX market reaction this morning is reflective of this finally hitting home for market participants,” Harvey said, adding that it was difficult to see the BoE front-loading rate hikes due to the risk of policy-induced recession.
The pound was also having to contend with domestic and international political uncertainty.
On Thursday, British lawmakers triggered an investigation into whether Prime Minister Boris Johnson had misled parliament, while an influential ally called for Johnson to quit.
Meanwhile, the British government is again failing to rule out taking additional measures to fix issues in Northern Ireland caused by post-Brexit arrangements.
ING said in a note that the threats by the UK government to rip up parts of the Northern Ireland protocol “could add some downside risks to cable (sterling/dollar)”.
(Reporting by Samuel Indyk, additional reporting by Dhara Ranasinghe; editing by Stefano Rebaudo, Tomasz Janowski and Susan Fenton)