The pound fell 0.2% to $1.2932 against the dollar in early European trading on Friday, after data showed that the UK economy unexpectedly shrank in January.
The UK's gross domestic product (GDP) contracted by 0.1% in January, according to data released on Friday by the Office for National Statistics (ONS). This was below analyst estimates of 0.1% growth and was down from 0.4% growth in December.
This has dealt a fresh blow to UK chancellor Rachel Reeves ahead of the spring statement, which she is due to deliver on 26 March.
Joe Nellis, economic adviser at accountancy and advisory firm MHA, said that the data has "brought the chancellor back down to Earth after the surprisingly high" growth in December.
"The quicker the economy grows and the larger it is, the more income the government takes in the form of tax revenues," he said. "With the government’s fiscal plans reliant on a level of tax revenues provided by a growing economy, flatlining economic growth highlights a difficult dilemma ahead of the spring statement later this month."
Nicholas Hyett, investment manager at the Wealth Club, highlighted that the fall in economic growth had been driven by a big slowdown in manufacturing output. Production sector output fell by 0.9% on the month in January, which the ONS said was mainly because of a 1.1% decline in manufacturing output.
Hyett said this was "unsurprising given the very uncertain outlook for exports with ever changing tariffs".
He noted that services had also slowed "dramatically", seeing just 0.1% growth in January. The biggest drags on monthly growth came from declines in food and beverage services, as well as accommodation, which contracted 2.1% and 3.4% respectively.
Hyett said that this comes as these sectors "expect to be hit hard by higher living wage and employer national insurance contributions in April".
"That's the really worrying thing about these numbers," he said. "Tariffs and increased labour costs were more worries than reality in January, the month covered by these numbers. Those worries will soon be transforming into realities."
"That leaves plenty of room for economic growth to deteriorate further, with far fewer catalysts to spark an economic recovery," Hyett added. "We could be at the start of a long slow slide into recession."
Meanwhile, the pound was little changed against the euro (GBPEUR=X) on Friday morning, trading at €1.1917.
Gold prices hit fresh highs on Friday morning, with futures (GC=F) topping the $3,000 mark, as investors continued to flock towards the precious metal as a safe haven, amid fears of an economic slowdown.
Gold futures (GC=F) rose 0.4% to $3,004.60 at the time of writing, while the spot price edged slightly higher to $2,990.81.
This came after US stocks endured another punishing session on Thursday, with the S&P 500 (^GSPC) falling 1.4%, closing in correction territory.
A sell-off in gripped US stocks at the start of the week, after Donald Trump declined to rule rule out the possibility that the US economy could dip into a recession this year, in an interview on Sunday. US stocks have continued to see volatility since then, as back and forth comments over trade tariffs have stoked concerns about the impact these levies could have on the economy.
In Trump's latest comments on tariffs on Thursday, he threatened a 200% levy on alcohol imports into the US from the European Union (EU). This came as a response to the EU's plans to impose a 50% tariff on American whisky, as a retaliation to US duties on steel and aluminium imports.
Jim Reid, market strategist at Deutsche Bank (DBK.DE), said that "Trump’s comments reignited fears that the EU could soon face a much more serious trade escalation, particularly with reciprocal tariffs set for April 2."
"Bear in mind that President Trump has said he considers VAT to be like a tariff, so that could cause considerable issues for EU member states," he added.
Adding to uncertainty in markets on Thursday was the threat of a US government shutdown, with funding set to run out at midnight on Friday. However, Democratic Senate minority leader Chuck Schumer said he would vote to advance a Republican bill to fund federal agencies through September, in a bid to avert a shutdown.
Oil prices rose on Friday, after the US imposed new sanctions on Iranian oil and shipping, raising concerns over tighter supply.
Brent crude futures were up 1% to $70.13 a barrel at the time of writing, while US West Texas Intermediate (WTI) crude climbed 1.3% to $67.38 a barrel.
However, Derren Nathan, head of equity research at Hargreaves Lansdown (HL.L), said that "tariff fears continue to dampen the demand outlook with the International Energy Agency now predicting a surplus that could reach 600,000 barrels per day by the end of the year, with the US producing at record levels and OPEC+ set to start pumping more crude out of the ground."
In broader market movements, the FTSE 100 (^FTSE) rose 0.4% to 8,574 points on Friday morning. For more details, check our live coverage here.
