Sterling fell to a 5-1/2-year-low against the dollar and on track for a seventh straight week of losses against the euro on Friday, as investors bet the Bank of England will not raise interest rates until 2017. Selling accelerated after a better-than-forecast US jobs number drove investors to the dollar capping a week which saw global stocks slide as China's rapidly depreciating currency sent shockwaves. That left sterling, which often moves in tandem with riskier assets, on track to post the worst performance among developed currencies so far this year.
"With the Federal Reserve now having no reason to hold off on its goal of returning monetary policy to more normal levels, further interest rate rises are a certainty - and this will continue to support the greenback," said David Lamb, head of dealing at FEXCO, a specialist currency firm. Sterling was down 0.6 percent at $1.4523, a level not seen since June 2010. That meant sterling has lost more than 8 percent in the last six months against the dollar.
Against the euro, the pound hit a 11-month low of 75.085 pence per euro on, and is down 1.5 percent for the week. That puts sterling on track for is its worst run of weekly losses in almost five years against the euro. Investors had until the start of this week been expecting a Bank of England rate hike by the end of 2016, but those bets have all but collapsed.
A poor run of sentiment surveys have underlined fears over Britain's broader economic outlook in a year likely to be dominated by a potentially damaging debate over a possible British exit from the European Union. BNP Paribas currency strategist Sam Lynton-Brown said investors have worried that a weakening Chinese yuan would cause an exported deflationary effect, holding down commodity prices and deferring pressure on BoE to raise rates.
"The market has turned extraordinarily dovish on expectations for the BoE ... The market is now pricing less than a 60 percent probability that the BoE will increase interest rates by 25 basis points by the end of this year. On Monday a full hike was priced in by November," he said. Data released on Friday showing Britain's trade deficit with the rest of the world narrowed in November, as cheaper oil reduced the cost of imports, could do nothing to boost the pound.
A number of banks are also recommending selling the pound in the near term given the risk of a destabilising referendum on whether Britain remains in the European Union. Prime Minister David Cameron has promised a vote on the matter by the end of 2017, but last month hinted it could come this year. Many are betting it could happen in June.
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