Sterling reached a 5 1/2-year low against the dollar on Wednesday, extending a brutal sell-off that has seen the currency shed almost 6 percent in only a month. The pound plunged by more than 1 percent on Tuesday after data showed British industrial output suffered its sharpest fall since early 2013 in November. That added to growing doubts about the strength of Britain's economy and encouraged bets that the Bank of England would not raise interest rates any time soon.
After the data, J.P. Morgan joined other big banks in pushing back forecasts for the first rise in UK interest rates since the financial crisis. It said no increase would come before the end of this year. The BoE will publish its first monetary policy decision of the year on Thursday, with most economists expecting no change in the 8-1 majority of policymakers who voted at the last meeting to leave rates on hold. Some reckon Ian McCafferty, who voted for an increase in December, might change his mind.
Sterling fell to $1.4380, its weakest since June 2010. Against the euro, it weakened 0.1 percent on the day to 75.035 pence, close to an 11-month low of 75.55 pence hit on Monday. Five-year gilt yields, which are sensitive to rate expectations, fell to near an 11-month low. They reached 1.086 percent, their lowest since October 2, before recovering to 1.095 percent by the end of the trading session, down around a basis point on the day.
"UK rates (are) pricing in a very dovish meeting, and the Bank of England is likely to deliver just that," said Saxo Bank's head of currency strategy, John Hardy. Sterling was likely to continue to trade in correlation with risk appetite. Sterling had earlier got some respite from a pick-up in risk sentiment as stocks and oil eked out modest gains, but they later fell, along with the pound. Britain's hefty current account deficit makes it one of the most vulnerable major currencies when market sentiment sours. Concern about an upcoming referendum on Britain's membership of the European Union have also weighed on sterling. Prime Minister David Cameron has promised a referendum by the end of 2017. It may come as early as June this year. With the outcome unclear, investors are bracing for uncertainty and volatility.