Sterling weakens as market selloff, data shakes sentiment

LONDON: The pound weakened broadly on Friday, pulling back from a 23-month high versus the euro touched in the previous session as weakness in Wall Street prompted investors to take profits after a rally this week.

Against a sturdy U.S. dollar, the pound eased 0.24% at $1.3560, its lowest level in more than a week. Versus the euro, the pound weakened 0.6% at 83.64 pence, moving away from a February 2020 high of 83.07 pence tested on Thursday.

Traders have pushed the pound higher on expectations the Bank of England will raise interest rates as early as next month to combat soaring inflation.

Money markets price in more than 100 basis points (bps) in interest rate rises in 2022 and an 87% chance of a 25 bps increase in February, after data showed on Wednesday that UK inflation rose faster than expected to its highest in nearly 30 years in December.

Another factor weighing on the pound was weak retail sales data. British retail sales slumped in December after consumers did much of their Christmas shopping earlier than usual in November and many people stayed at home due to the spread of the Omicron coronavirus variant.

“The December retail sales report is unequivocally bad news, and it’s reasonably clear that elevated price pressures in the goods sector contributed to the retrenchment in spending,” BMO strategists said.

Domestic politics has not hurt the pound even as Prime Minister Boris Johnson has fought to save his premiership in the face of a revolt in his party over a series of lockdown parties in Downing Street.

“The pound has not paid much heed to recent headlines regarding the position and character of PM Johnson as this can be explained by the fact that no general election is scheduled until 2024 in the UK and whoever is party leader will inherit a large parliamentary majority,” Rabobank strategists said.