Sterling sank to a six-week low against a broadly stronger US dollar on Wednesday as a weaker-than-expected batch of economic data added to political nerves that have begun to weigh on the currency again after last year's Brexit vote. The pound has been struggling in the face of figures in the past fortnight suggesting the UK economy was finally beginning to suffer from the uncertainty around Britain's planned exit from the European Union over the next two years.
A regular survey of manufacturing purchasing managers on Wednesday showed the factory sector holding on to much of its post-Brexit vote momentum while growing more slowly in February than expected.
Possibly of greater concern for an economy entering a period of political uncertainty with a huge current account deficit, was the more than net doubling of sales of gilts by investors in January compared to December.
But it took a burst of selling after the arrival of US traders after 1100 GMT to drive the pound first past support at $1.2350 and then below $1.23 for the first time since mid-January. "This is a signal of the direction of travel on cable (dollar exchange rates) now," said Viraj Patel, a strategist with ING in London.
"You see the pattern we saw last year where you have a period of stability and then the downside break, so we could be back towards $1.20 in the next couple of months. It is partly the dollar story, partly sterling and the political concerns."
By 1630 GMT, the pound was down half a percent on the day against both the dollar and the euro at respectively $1.2316 and 85.78 pence per euro. It was the fourth day running it had fallen against the dollar, its longest losing streak since mid-December.
Bank of England figures also showed the pace of credit growth slowing for a second month. The gilts numbers showed net sales by foreign investors rose to 7.6 billion pounds compared with less than 3 billion in December. "The focus (of the market) was on the foreign selling of gilts, which was the largest since 2014 and puts the spotlight back on the financing of the current account deficit," said Kamal Sharma, a strategist at Bank of America Merrill Lynch.
"Rate differentials still suggest that GBP/USD should move back towards the lower end of its trading range, so towards $1.20." BAML's Sharma, like a number of other analysts, says Britain's formal triggering later this month of talks on leaving the European Union under Article 50 of the bloc's constitution, may lead to more selling of the pound.
That view has been encouraged in recent days by reports the Scottish government was on the verge of calling for a second referendum on independence. The Scots, in contrast to England and Wales, voted to remain in the EU last June.
On Wednesday Prime Minister Theresa May was also facing her first defeat over her plan to exit from the European Union over the future rights of EU nationals.
"I think sterling could be the surprise now," said Simon Derrick, head of global market research at Bank of New York Mellon in London. "The rise of these discussions on Scotland is important. While it didn't matter in 2014, I think sterling has become a lot more sensitive and the triggering of a (Scottish) referendum after article 50 may bring some pressure to bear."
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