Sterling fell to a three-month low against the dollar on Friday, hit by a raft of soft data out of the UK this week that has made investors more doubtful that the Bank of England will raise interest rates soon. It also lost ground against the lower-yielding euro, which was supported by an unwinding of carry trades, as global stocks traded in the red. The euro tends to do well during a risk-off environment as investors unwind risky carry trades, in which they sell a lower-yielding currency to buy a higher-yielding one or riskier asset.
The euro had fallen on Thursday after European Central Bank chief Mario Draghi flagged downside risks to the euro zone economy and inflation and kept the door open for more quantitative easing. Draghi's dovish stance was a contrast to BoE Governor Mark Carney, who said on Saturday that, while a slowdown in China's economy could push down inflation, it did not for now change the BoE's position on when and how it might raise rates.
Sterling failed to gain much traction, however, especially since data on Thursday indicated that Britain's dominant services sector had grown in August at its weakest pace in more than two years. Manufacturing and construction sector surveys also fell short of expectations, prompting some economists to revise down their growth forecasts for the third quarter. A survey by the accountancy firm BDO released on Friday indicated that British retail sales in August had suffered their biggest decline in seven years.
Sterling extended losses after a key US jobs report kept alive expectations that the Federal Reserve could raise rates perhaps as early as this month, hitting a low of $1.5183, its lowest level since June 5, and was on track for its second straight week of losses. The euro rose to 73.15 pence, recovering from Thursday's low of 72.76, hit in the aftermath of Draghi's comments. "Sterling is not enjoying this environment of weak risk sentiment, as euro/sterling merely settled lower rather than melting down yesterday after Draghi's performance," said John Hardy, head of FX strategy at Saxo Bank. "Sterling is only likely to rally if we see an improvement in the market mood."
Sterling has lost more than 3 percent on a trade-weighted basis in the last two weeks alone as investors have pushed back the expected timing of the first UK rate hike, given renewed market ructions and worries about a China-led global slowdown. Many investors expect the BoE to raise rates only after the Fed has lifted off. A month ago, sterling money markets were pricing in a hike around the beginning of next year, but the earliest that they now expect the BoE to move is around April or May.
"The Fed still has plenty of reasons to hold off raising rates for a while longer," said David Lamb, head of dealing at foreign exchange firm FEXCO. "Even if the Fed doesn't pull the interest rate trigger in September, this jobs report will ensure the decision will be as finely balanced as ever."
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