Sterling fell against the dollar and the euro on Thursday after a series of soft UK housing figures suggested the sector was beginning to feel the pinch from recent Bank of England's interest rate hikes. Nationwide's home sales survey showed UK house prices rose just 0.1 percent on the month and 9.9 percent on the year, the weakest rise since April 2006.
The building society said the easing in house price inflation suggested five interest rate hikes since August 2006 were taking their toll on the housing market. Separate data from the British Bankers' Association showed mortgage approvals for house purchases in June fell 11 percent on the year.
By 1410 GMT, sterling was down 0.3 percent on the day at $2.0475, having hit a 26-year peak at $2.0655 on Tuesday. The euro was up 0.3 percent at 67.03 pence, recovering from Wednesday's five month low of 66.78 pence. "The BBA and the Nationwide numbers out earlier are indicative of a general slowing in the housing market activity," said Jeremy Stretch, strategist at Rabobank.
"The evidence is building that the lagged effects of the previous (BoE) tightenings are starting to influence housing sentiment." But financial markets are still pricing in one more rate increase this year, to 6 percent.
"We need to see a sustained downward trend in indicators of economic activity and prices in the economy more widely before the MPC moves away from its tightening bias," Fortis Bank said in a research note. Another factor weighing on sterling was a pick up in risk aversion, sparked by troubles in the US subprime mortgage market and falling equity markets.
That made investors scale back carry trade investments where low-yielding currencies like the yen are borrowed cheaply to fund purchases of higher return units such as sterling. "Because investors might be losing money in the subprime market, they would begin to take profits on earlier trades in high yielding currencies including sterling," said Daragh Maher, senior currency strategist at Calyon.