LONDON: Sterling hovered near seven-year lows against the dollar on Thursday and was on course for its worst weekly performance since 2009 as investors fret about a possible British exit from the European Union.
Uncertainty created by the June 23 referendum on whether to stay in the EU meant data confirming the economy grew at 0.5 percent in the fourth quarter was largely ignored. The figure was unchanged from an initial estimate and as expected by most economists in a Reuters poll.
Business investment fell at the sharpest pace in nearly two years, however, hit by disposals in the transport equipment sector, adding to the gloomy sentiment that has dragged on the pound in recent days.
Sterling was 0.1 percent lower at $1.3910, not far from a seven-year low of $1.3878 struck on Wednesday, when selling accelerated as companies and investors rushed to protect themselves against the chances of a British exit. Some sellers are targeting $1.35 and below, levels last seen when the pound sank towards parity with the dollar in the mid-1980s.
The euro was slightly higher at 79.18 pence, not far from a 14-month high of 79.28 pence.
"Current political uncertainty is driving sentiment for sterling as the UK is struggling to come to terms with the battle over a potential "Brexit"," said Alex Lydall, senior sales trader at Foenix Partners, a company which offers hedging solutions to small and medium sized companies in Britain.
Analysts say uncertainty stemming from "Brexit" is likely to hit investment flows and could lead to a bigger current account gap, already among the biggest in the developed world at 5 percent of gross domestic product.
A larger current account gap usually leads to a weaker currency as outflows outpace investment flows.
An exit from the European Union, Britain's largest trading partner, would also be likely to impact business and consumer confidence, hit growth and lead to more unemployment.
HSBC, Britain's biggest bank, said the currency could lose up to 20 percent of its value and economic growth could be up to 1.5 percentage points lower next year if Britain votes to leave.
Campaigning for the referendum has highlighted sharp differences within Prime Minister David Cameron's government and the ruling Conservative party.
On Wednesday, justice minister Michael Gove, long a Cameron ally but now advocating an exit from the EU, said Britain's deal on new terms for membership could be undone by the European Court of Justice despite support from all member states.
European Council President Donald Tusk, who negotiated the deal with Cameron, said however that it was "legally binding and irreversible" and "cannot be annulled by the ECJ".
Another political heavyweight, London Mayor Boris Johnson, has also joined the 'Out' camp.
"Uncertainty surrounding the upcoming referendum will remain the central driver for the currency over the next four months," Credit Agricole analysts said in a note.
The impact of the uncertainty has remained confined to the currency so far, however, with other UK markets showing a rather muted response.
Government bond prices are broadly steady on the week with any nervousness among investors holding UK assets offset by the prospect that the vote will further push back any rises in interest rates by the Bank of England.
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