Weaker expectations for an early rise in British interest rates sent sterling down against the euro on Wednesday and muted gains against the dollar despite a similar deterioration in the outlook for US rates. US data drove a renewed dollar sell-off on Wednesday, eating further into gains made since July, as investors pushed back expectations for a first rise in US rates into 2016.
Gilts and money market instruments also suggest expectations on UK rates have shifted, most likely to July or later from the first quarter of next year. Sterling itself weakened by 0.7 percent to 80.10 pence per euro and was just a third of a percent higher against the dollar. It was the first time the euro has been worth more than 80 pence since early September.
"The shift in rate expectations has certainly put some pressure on sterling and I would expect that to continue into the 81 pence area in the short-term," Morgan Stanley head of European FX strategy, Ian Stannard, said. The spread of UK two-year government bond yields over their German alternatives sank to less than 50 basis points, its lowest since May. Weak jobs data did nothing to encourage expectations of action by the Bank of England.
Jobs growth in Britain was at its slowest in more than a year in the three months to August, official data showed, even as the unemployment rate fell more than expected. Wages inched up, lagging far behind inflation. The Bank of England has said that any rise in interest rates from their historic lows will be dependent on economic data, especially wage growth. In the wake of Tuesday's data showing inflation slowing sharply as food and motor fuel prices fell, sterling had fallen as low as $1.5878 in Asian trade - its weakest since November. It recovered to $1.5953 on Wednesday having traded briefly above $1.60.
"The key still remains this relentless downward pressure in imported inflation," Bank of New York Mellon head of currency research Simon Derrick said. "If you have no imported inflation, if there is no desperate need to raise rates, why should sterling be the place to park your money at the moment?"