Sterling fell for a sixth straight day against the dollar on Friday, its worst run in nine months, erasing all gains made since national elections three weeks ago as investors worried about a possible "Brexit" from the European Union. The pound had rallied after the centre-right Conservatives unexpectedly triumphed in the May 7 vote with an overall majority. But since peaking at $1.5815 a week later, it has shed almost 4 percent as the Conservatives' promised in-out referendum on EU membership has come into focus.
Prime Minister David Cameron's government introduced a law in parliament on Thursday to guarantee the EU referendum will be held by the end of 2017. It also disclosed the question voters will be asked, making it "Yes" to stay in, "No" to leave. Further dampening investor sentiment around the pound has been a run of weaker-than-expected data that has pushed expectations of when the Bank of England will start to raise interest rates further into next year.
"We had a bit of a risk premium priced in at the beginning of May ... and then in the reaction that we had to the election, we went from sterling undershooting its fair value to overshooting its fair value," said Michael Sneyd, a currency strategist at BNP Paribas. "A lot of the move in the last couple of weeks has been the unwinding of that, but also the fair value itself has fallen." Sterling fell to as low as $1.5237 on Friday, its weakest since the day of the election. Against the euro, the pound fell 0.7 percent to a ten-day trough of 72.005 pence.
A survey published on Friday showed British consumer morale fell unexpectedly this month as optimism about the economy in the next 12 months faded fast. That followed official data on Thursday showing the UK's gross domestic product grew just 0.3 percent in the first three months of this year, casting doubt on the strength of Britain's previously robust recovery and disappointing market expectations of an upward revision to GDP. The GDP data showed that the services sector grew at its weakest pace in two years and also highlighted a sharp rise in imports, worsening the net trade position for the United Kingdom, which already runs a large current account shortfall.
"Investor sentiment would have been weakened by the news that the services sector expanded at its slowest speed for over two years," said Jameel Ahmad, market analyst at FXTM. British government bond prices rose modestly, tracking German Bunds and US Treasuries higher. At 1539 GMT the 10-year gilt yield was down 2 basis points on the day at 1.80 percent, having earlier touched its lowest level since May 8 at 1.792 percent.
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