Sterling falls to 6-1/2-month low versus dollar

Sterling fell to a new 6-1/2-month low against the dollar on Tuesday on concerns about the economic outlook and expectations that the Bank of England might be done with rate hikes.

The greenback reached fresh 11-month highs after strong U.S. economic data bolstered the view that the Federal Reserve will keep interest rates higher for longer.

Sterling hit $1.2061, its lowest level since mid-March, and was last down 0.1% at $1.2075.

The gloom around the U.K. economy cleared a bit last week, as growth for the year’s first quarter was revised significantly upwards. Still, concerns about the state of the economy recently supported the pound selloff.

Britain’s economy displayed apparent recession signals a couple of weeks ago, a day after the Bank of England called to halt its long run of interest rate increases.

“What hurt sterling was the adjustment of market expectations for future rate hikes,” said Roberto Mialich, global forex strategist at Unicredit, after mentioning that before summer investors priced in a terminal rate at 6%.

Money markets show traders price a 32% chance of a rate rise at the upcoming BoE meeting in November. They also see an around 40% chance of a terminal rate at 5.5% by year-end or early 2024, from the current 5.25%, and almost no chance of the BoE hiking up to 6%.

“We don’t see any catalyst able to change the market direction, with the pound that will probably test its year-to-date low at 1.1805,” Unicredit’s Mialich added.

Speculators added to their short positions for the fifth week running in the week to Sept. 29, CFTC data showed.

“The move was driven by an increase in short positions” after the BoE did not raise rates during the September 21 meeting, Jane Foley, senior forex strategist at Rabobank.

Last month, the pound fell by over 3% in its biggest slide since last September’s budget crisis, which stripped almost 4% off the currency.

According to Francesco Pesole, rate strategist at ING, “the swap rate gap (between U.S. and UK) is consistent with GBP/USD trading around current levels and a break below 1.2000”.

Against the euro, the pound was last up 0.1% on the day at 86.76 pence.

Investors have sold the pound and the euro as Britain’s economic outlook and the euro zone have darkened.