Sterling edged down against the euro on Friday, close to an eight-month low and capping its worst week since October, as the euro rallied across the board on bets the European Central Bank is on track to tighten monetary policy next year. By 1430 GMT the pound was trading down 0.1 percent on the day at 89.76 pence, having earlier touched 89.91 pence.
That was its weakest since early November, as it built on losses the previous day when ECB chief Mario Draghi said possible changes to the central bank's expansive stimulus programme would be discussed in the autumn. Though he kept the door open to further easing, investors interpreted Draghi's comments as less dovish than previous ECB meetings and the euro shot up broadly, hitting its highest levels in almost two years against the dollar. The pound was on track to lose 2.5 percent against the euro this week.
Against the dollar, sterling was trading up around 0.1 percent at $1.2990. Earlier in the week it traded above $1.31 but it slipped on weaker-than-expected inflation data, which poured cold water on expectations that the Bank of England could hike interest rates in the coming months.
"The pound is by some distance the worst performing G10 FX over the last five trading days and has dropped 0.85 percent versus the US dollar - the only G10 currency to fall versus the dollar over that period," said MUFG's European head of global markets research, Derek Halpenny.
But Halpenny said he was upbeat on the currency from here on, viewing political risk as easing off. He cited as important reports that the British cabinet is united over the need for a transitional period when Britain leaves the European Union. Prime Minister Theresa May moved to ease concerns over Brexit among British business on Thursday, saying she wanted a "smooth, orderly exit" from the EU including "a period of implementation in order to avoid any cliff-edges".
"We view the emerging signs of a cabinet deal on Brexit direction as very significant and are somewhat surprised by the muted attention this important development is currently receiving," Halpenny said. MUFG has one of the most bullish sterling forecasts in the market, seeing the currency reaching $1.40 by the second quarter of next year.
Others take a more pessimistic view. "Sterling's weakness should not be underestimated in the current dollar-selling backdrop," said ING currency strategist Viraj Patel. "The stagflation warning signs are flashing for the UK economy after this week's data, while any 'soft' Brexit euphoria is slowly beginning to fade as the reality of difficult negotiations begins to sink in."
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