LONDON: Sterling hit a four-month low against the dollar on Thursday on persistent selling pressure a day after the Bank of England indicated that it is in no hurry to raise interest rates due to subdued wage growth in the economy.
So poor is sentiment towards the pound that it also struggled against the euro, which hovered near a 9-month low against the dollar after dismal growth data from Germany and France. The euro, in fact, hit a fresh 6-week high against the pound in early European trade.
Traders said investors were still unwinding bullish bets after the BoE's quarterly Inflation Report took markets by surprise on Wednesday. They had taken those bets on the currency after BoE Governor Mark Carney said in a speech in June that tightening would come sooner than many anticipated.
But Wednesday's BoE report and dovish Carney's comments in a news conference prompted investors to push back expectations of when rates would rise to early next year from late 2014. In the report, the BoE slashed forecasts for wage growth by half and Carney said a pick-up in earnings pickup would help determine the timing of rate hikes.
Sterling overnight interbank average rates are now pricing in the chance of a hike in March, having been pricing in a slight chance of a December rise.
Sterling fell 0.1 percent to $1.6657, the lowest since mid-April, having posted its biggest daily drop in over six months on Wednesday. The pound has shed almost 3 percent since hitting a six-year high of $1.7192 in mid-July.
The euro rose to a six-week high of 80.215 pence , extending gains seen on Wednesday. Sterling's broad-based losses took it to its lowest against a trade-weighted basket of currencies since June 12.
"If wage growth continues to disappoint it would likely push back expectations for the first rate hike later into 2015. In these circumstances, the pound is likely to continue to trade on a weaker footing in the near-term," Bank of Tokyo Mitsubishi currency analyst Lee Hardman said.
Morgan Stanley, among other banks, switched trading recommendations and is now looking to sell the pound against the dollar on a bounce.
"We look to use rebounds towards $1.6750 to establish short positions," Morgan Stanley said in a note.
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