LONDON: Sterling hit a one-month low against a basket of currencies on Monday and suffered its most volatile day against the euro for six years after a plunge in global stocks cooled expectations that the Bank of England will lift interest rates any time soon.
An 8.5-percent slide in Chinese shares sparked a global sell-off, with the Dow Jones Industrials plunging as much as 1,000 points and Britain's FTSE 100 down as much as 6 percent, among its biggest one-day falls on record.
The volatility spilled over into UK currency and interest rate markets. The euro surged above 74 pence for the first time since May, at one point pushing sterling down more than 2 percent. That was its biggest fall since 2009.
Money markets pushed out the timing of when the Bank of England (BoE) will raise rates to the third quarter of next year compared with early 2016 when the BoE published its quarterly inflation report just three weeks ago.
"The market has repriced quite substantially," Barclays currency strategist Nikolaos Sgouropoulos said.
"It's not fundamentals driving this move, it looks more like a liquidity squeeze," he said.
By 1500 GMT, the euro was up 1.5 percent on the day at 73.50 pence, and sterling's trade-weighted index was at a one-month low of 93.00.
Trade-weighted sterling hit a 7-year high of 94.80 as recently as last week, supported by comments this month from BoE governor Mark Carney that the decision to raise rates was likely to come into "sharper relief" at the turn of the year.
Since then, however, a slump in Chinese stocks and devaluation of the yuan has sent global markets into a tailspin.
The FTSE 100 has lost 11 percent in two weeks and has fallen 10 days in a row, its longest losing streak since January 2003.
Sterling was firmer on Monday against the dollar, which fell broadly as expectations the Federal Reserve could raise rates next month evaporated. Sterling rose 0.3 percent to $1.5745.
Recent UK economic data has sent mixed signals to the BoE.
The housing market looks strong enough to warrant higher interest rates, some economists say, but the last retail sales figures were well short of economists' expectations. UK bond markets ended Monday's rollercoaster session close to where they started.
The yield on 10-year gilts fell two basis points to 1.80 percent and that on the two-year bond rose one basis point to 0.51 percent.
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