Sterling fell against the dollar on Thursday after the president of the European Council said EU leaders would not engage in negotiations on Britain's exit from the bloc at Prime Minister Theresa May's first summit in Brussels. Donald Tusk said he expected May to brief the other 27 leaders later, but had ruled out negotiations until May formally launches the Brexit process. He rejected suggestions that the new premier would face a hostile reception and said talks would remain cordial.
Sterling hit a two-day low of $1.2213 after the comments, down 0.6 percent on the day, before recovering to about $1.2240 by 1425 GMT. That still left it down 0.4 percent on the day. "The 'no pre-negotiations' comment is pushing the pound lower," said Mizuho's head of hedge fund FX sales, Neil Jones. "He said he is not prepared to negotiate until the button is pressed (and) investors believe this is bad for the pound."
Tusk's comments coincided with a press conference with European Central Bank President Mario Draghi, during which Draghi said policymakers had neither discussed extending the ECB's extensive bond-buying programme, nor ending it. There had been speculation in recent weeks that the ECB could be heading towards winding back the bond purchases - so-called "tapering". Draghi's comments drove the euro to a four-month low against the dollar, as investors bet monetary policy would remain ultra-loose.
A weaker euro left the pound flat against it at 89.30 pence. Earlier, data showing British retail sales recorded their strongest quarter of growth since late 2014 in the three months to September, with consumer sentiment remaining firm since June's Brexit vote, had little impact on the currency. Economic data has played second fiddle to politics for sterling in recent weeks: there was also little reaction to data on Wednesday showing UK job creation had slowed, but not collapsed, after the EU referendum.
More important to investors have been any signs that Britain might not undergo the "hard Brexit" that many of them fear - in which access to Europe's single market would be sacrificed in favour of tighter controls over immigration. Worries over such an outcome sent sterling to a record trade-weighted low last week. Sterling was boosted on Tuesday, for example, when a lawyer representing the government in a High Court challenge over who has the right to trigger the divorce process between Britain and the EU said any agreement would "very likely" require the agreement of parliament, not just the ruling Conservative government. "Given what we've seen over the last few weeks, politics rather than fundamental data is probably going to be the most important driver," said UBS Wealth Management currency strategist Geoffrey Yu. "And, from talking to clients, what's driving sterling at the moment is less short-term data - people are starting to shift towards what can happen to the inflation trajectory and how's that going to impact the Bank of England outlook."