Sterling hovered near an eight-month low against the dollar on Friday and was heading for its worst week since August on a trade-weighted basis, on bets the Bank of England is in no rush to follow the US Federal Reserve with an interest rate rise.
In a widely anticipated move, the Fed raised its benchmark interest rate on Wednesday by 25 basis points and signalled that it would raise rates 4 more times next year, sending the dollar higher against all major currencies. Though the BoE is expected to be the second major central bank to raise rates since the financial crisis, investors do not expect a move until late 2016, or even in 2017. Data this week showing inflation at zero and slowing wage growth will keep pressure off the BoE.
BoE Deputy Governor Minouche Shafik said on Monday there was less of a need for the BoE to act at the moment than the Fed. "For years, the base case assumption has been that the UK would follow a US rate hike pretty quickly, while others would drag their heels," said Societe Generale macro strategist Kit Juckes. "Well, with wage growth slowing again in the latest data and the 'Brexit' vote looking set for next summer, the MPC (monetary policy committee) seems likely to be well over at least six months behind the FOMC. The short-rate divergence has seen sterling flounder."
Sterling edged down 0.1 percent on Friday to $1.4894, less than 20 cents away from a low of $1.4865 hit on Thursday - its weakest since late April. Against the euro, the pound fell 0.2 percent to 72.80 pence. It hit 91.3 against the BoE's trade-weighted sterling basket, leaving it down 1.4 percent for the week - the worst performance since late August. "Sentiment towards sterling has also been eroded," said FXTM research analyst Lukman Otunuga, highlighting Shafik's comments. "With UK inflation rising at a tepid pace, the recurrent fears that the Bank of England may push back raising rates deep into 2016 has reduced investor attraction towards the pound. Sterling remains vulnerable and this should encourage sellers."
Many investors also see a possible British exit from the European Union, or "Brexit", as a significant risk for sterling. Prime Minister David Cameron gave his strongest hint yet on Friday he would hold a referendum on EU membership next year, saying 2016 would see the 28-member bloc finally address Britons' concerns.
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