Sterling's rally faltered on Thursday despite the Bank of England striking a less dovish tone than other central banks, as policymakers slashed their second-quarter growth forecasts and flagged risks from trade tensions and a no-deal Brexit. BoE policymakers, as expected, voted unanimously to keep interest rates on hold at 0.75%. They stuck to their message that rates would need to rise in a limited and gradual fashion, so long as Britain avoids a damaging no-deal exit from the European Union.
The BoE message was far less dovish than the US Federal Reserve and European Central Bank, which this week opened the door to rate cuts and more stimulus to counter any economic slowdown and rising trade tensions. But policymakers did note a darkening global outlook and said Britain's economy was now on track to stagnate in the second quarter, rather than grow 0.2% quarter-on-quarter as it had forecast last month.
The pound didn't budge after Brexit campaigner Boris Johnson scored by far the higher number of votes in the latest round of the Conservative party leadership contest, in which the number of candidates vying to become party leader and replace Theresa May as prime minister was whittled down to three. Another vote later on Thursday will reduce the field to two candidates, with results due around 1700 GMT. Grassroots party members will then decide the winner by the end of July.
The pound, trading around $1.2720 before the BoE announcement, fell to around $1.27, still leaving it up 0.4% on the day.
Sterling has rallied in recent days, pulling away from five-month lows, as investors dumped the dollar following the Fed's dovish signalling.
Against the euro, the British currency extended its losses and was down as much as 0.5% at 89.22 pence, before steadying at 88.91 pence by 1500 GMT.
"On the whole the message is following the theme set by the bank's peers in recent days by turning more dovish," said David Cheetham, an analyst at online broker XTB.
Cheetham added that while the BoE had stopped short of delivering as strong a signal as other central banks, "it does seem increasingly likely that the next move will be an interest rate cut rather than a hike."
Markets are not pricing for a BoE hike any time before August 2020. Earlier, data showed British retail sales falling in May 0.5% month-on-month, in line with forecasts.