Sterling fell to a three-week low against the dollar on Friday, nursing losses for a second straight week after the International Monetary Fund joined the Bank of England to warn of risks if Britain leaves the European Union. Losses accelerated in the afternoon session in Europe after the dollar was boosted by a strong US retail sales report. Retail sales in April recorded their biggest increase in a year, suggesting the US economy was regaining momentum after growth almost stalled in the first quarter.
Retail sales jumped 1.3 percent last month, the largest gain since March 2015. March's retail sales were revised up to show a 0.3 percent decline instead of the previously reported 0.4 percent drop. Sterling weakened to $1.4360 after the US data was released, its lowest since May 22. The euro was flat against the pound at 78.745 pence.
The pound had started on a weak note with sentiment weighed down by Carney's warnings on Thursday. Carney said Britain's referendum on European Union membership was the "elephant in the room", telling reporters it was the most significant risk to the Bank's growth and inflation forecasts. In its quarterly inflation report, the BoE stepped up warnings about the economic risks of a Brexit, saying sterling could weaken and unemployment would probably rise. Carney said that a "technical recession" was possible in the event of a Brexit, but that was not the most likely scenario.
Carney's comments triggered sharp criticism from those campaigning for Britain to leave the EU, with some accusing him of becoming too political. "The BoE's warning on the potential negative impact on the economy in the event of Brexit strengthens the 'Remain' campaign by increasing fears over abandoning the status quo," said Lee Hardman, currency strategist at Bank of Tokyo Mitsubishi.
Polls are pointing towards a very closely fought referendum and with only six weeks until the June 23 ballot, investors are becoming more worried about the risks from a potential exit. International Monetary Fund chief Christine Lagarde said on Friday there were no economic positives. In an annual report on Britain's economy, the IMF said the country risks falling into a spiral of weaker growth, lower house prices and diminished foreign investment if voters opt to leave the European Union.