Banks turn bearish on trade-weighted sterling

LONDON: Sterling extended this week's run to 17-month lows against the dollar on Wednesday after bearish calls by some major banks who feel the weaker pound still does not reflect a softening in interest rate expectations.

Signs Britain's economic recovery may be losing steam have prompted investors to push back the estimated timing of a first Bank of England interest rate hike into next year. Six months ago many expected a move before the end of 2014.

But while the pound has weakened steadily against the dollar, by the start of this year it had fallen less than 1 percent against a basket of currencies from peaks last July. Since then, it has slumped 1.6 percent in three days.

Merrill Lynch, Morgan Stanley and Bank of New York Mellon are among the major banks who have called for a fall in sterling at the start of the year.

"We still prefer shorts in sterling against the dollar to shorts in the euro," Kit Juckes, an analyst with Societe Generale in London said in a note to clients on Wednesday.

"Positioning is less of a challenge, weak UK economic data continue to surprise the market and the drag from political uncertainty will be a constant theme in the coming months."

By 0924 GMT, sterling was trading down 0.1 percent 1.5133, having hit a 17-month low of $1.5118 in Asian trading. It inched up to 78.39 pence per euro.

The run in to May's general election has got under way in earnest since New Year, David Cameron's ruling Conservatives launching a salvo on opposition Labour's lack of credibility on efforts to reduce the budget deficit.

Labour has been keeping a lid on spending promises in response, but, amid a raft of media reports on rising waiting times in hospitals, has attacked the government on the impact on public services of five years of austerity.

Rather than the relatively slender differences on policy between the main parties, it is the prospect of a "hung" parliament where neither can form a government and a drift towards the anti-EU UKIP party, that bothers investors most.

"While the policies currently being presented by the major parties are unlikely to be attractive to foreign investors, we believe that it is likely to be the uncertainty that keeps GBP under sustained pressure," said Ian Stannard, head of European FX strategy at Morgan Stanley.