UK growth concerns knock shaky pound

LONDON Tue Jan 8, 2013 4:52pm GMT

A generic picture of a some British sterling money in coins and bank notes. BANKG REUTERS/Catherine Benson CRB

A generic picture of a some British sterling money in coins and bank notes. BANKG

Credit: Reuters/Catherine Benson CRB

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LONDON (Reuters) - Sterling fell against the dollar on Tuesday and was vulnerable to further falls after a weak retail sales survey added to concerns about faltering UK economic growth.

The pound weakened 0.4 percent versus the dollar to $1.6041 (9999 pence), edging close to the $1.6010 level hit on Friday, its lowest in nearly a month, and staying well below last week's 16-month high of $1.6380.

More falls could push it towards the December 10 low of $1.5999 and then the 200-day moving average at $1.5902.

Data from the British Retail Consortium showed retailers' Christmas sales barely rose, reinforcing concerns the economy may have contracted in the fourth quarter of 2012.

It followed on the heels of a purchasing managers' survey last week that showed activity in the UK economy's dominant services sector slowed by its biggest margin in two years in December.

"Today's moves are still reflective of what happened last week after the weak services PMI, which has kept sterling under pressure," said Richard Driver, analyst at Caxton FX.

"Sterling's shelf life above $1.60 is limited," he said, adding it could drop towards the mid-November low of $1.5828 over the coming weeks.

Weak UK data will increase concerns about the possibility of more monetary easing from the Bank of England in the months to come and about the risk of the UK losing its prized triple-A credit rating.

The Bank of England is scheduled to announce its latest policy decision on Thursday, although it is widely expected to hold interest rates and not make any additional asset purchases to stimulate the economy.

"The specific focus for sterling is how early indications for Q4 (2012) and Q1 (2013) GDP look," said Adam Cole, global head of FX strategy at RBC Capital Markets.

Citi analysts, in a note to clients, said a weaker-than-expected economic recovery and subdued inflation pressure could prompt the BoE to restart its asset purchase programme after the release of its quarterly Inflation Report next month. That would add pressure on sterling.

The pound was also dragged lower with the euro, which weakened against the dollar as investors looked ahead to a European Central Bank meeting on Thursday, when policymakers could hint at future interest rate cuts.

The euro edged up 0.1 percent to 81.46 pence, pulling away from a three-week low of 80.86 pence hit last week.

POUND VULNERABLE

Analysts said a weak UK economy could harm the pound's reputation as a relative safe haven during times of heightened concern about the euro zone debt crisis, especially if there is a growing risk of the UK losing its top-notch credit rating.

"People have ended up buying sterling thinking it is a safe-haven currency but I think people haven't looked enough at the fundamentals," said David Bloom, global head of FX strategy at HSBC, adding that the perception of the UK as a safe haven should reverse.

"I think the UK will lose the battle of the uglies this year ... we don't think the fiscal situation looks good."

Bloom expected sterling/dollar would fall to $1.52 by year-end, while euro/sterling should rise to 88 pence.

An earlier survey showing improved business morale in the last quarter failed to lift the pound. Another poll showed UK inflation expectations dipped in December but remained relatively high at 2.7 percent.

(Additional reporting by Phlip Baillie; Editing by Susan Fenton)

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