LONDON Sterling slipped on Friday, heading for its first week of falls in three with investors having pushed back their expectations for a Bank of England interest rate hike and after disappointing services sector data.
The latest numbers came in the closely watched monthly purchasing managers' index (PMI) for the dominant services industry, showing the first drop since October and following small falls in the construction and manufacturing equivalents earlier this week.
Along with a handful of other second-tier numbers on housing and sentiment, the services sector data are the first signs that consumers and companies could be starting to suffer from the decision last year to leave the European Union.
"A benign interpretation of the Brexit process and strong UK data had perhaps lulled the sterling market into a false sense of near-term security," analysts from Bank of America Merrill Lynch said.
Sterling slipped to as low as $1.2457 on Friday, leaving it around two-and-a-half cents weaker than a seven-week high above $1.27 touched on Thursday before the BoE's latest inflation report was released and Governor Mark Carney gave a press conference in which he flagged the risks of Brexit.
The Bank upped growth forecasts but declined to do the same on inflation, and pointed to interest rates staying on hold long into next year.
That led investors to push back their expectations of when the first hike in a decade would come, with investors now pricing in only around a 1 in 3 chance of a hike this year, down from a 1 in 2 chance before the BoE report.
"The market was priced for a more hawkish Bank of England," said Rabobank currency strategist Jane Foley. "So that was a catalyst but I do think sterling’s gains had just gone too far."
"(When) we move into March and that's when the Brexit negotiations start, that's when the Europeans get the chance to push back, and that's when how complicated an issue it (Brexit) is becomes far more apparent," she said.
Sterling is still almost 3 percent higher since Prime Minister Theresa May laid out the government's vision for divorce from the EU in a speech just over two weeks ago.
The government on Friday welcomed the dismissal of a legal bid to force parliament to approve any attempt to take Britain out of the European Economic Area (EEA) and the single market as part of its exit from the EU. [nL5N1FO4HY
Another cautionary note on the economy on Friday came from data showing the number of new homes built in London fell 6 percent last year while an indicator of future supply dropped by a third.
Against the euro, the pound slipped half a percent to 86.42 pence, its weakest in ten days.
(Editing by Tom Heneghan)