LONDON (Reuters) - Sterling fell to a three-month low against the dollar on Friday, hit by a slew of soft data out of the UK this week that has raised doubts amongst investors on when the Bank of England will hike interest rates.
It also lost ground against the lower-yielding euro, which was supported by an unwinding of carry trades, as stocks in Europe and Asia traded in the red. The euro tends to rise during a risk-off environment as investors unwind risky carry trades, in which they sell a lower-yielding currency to buy a higher-yielding one or riskier asset.
The euro had been hit on Thursday after the European Central Bank chief Mario Draghi flagged downside risks to the euro zone economy and inflation and kept the door open for more quantitative easing.
Draghi's dovish stance was a contrast to BoE Governor Mark Carney, who said on Saturday that while a slowdown in China's economy could push down inflation, it did not change, for now, the BoE's position on when and how it might raise rates.
Sterling, however, failed to gain much traction, especially since data on Thursday showed Britain's dominant services sector grew at its weakest pace in more than two years in August. Manufacturing and construction sector surveys also fell short of expectations, prompting some economists for forecast a slower growth in the third quarter.
Sterling hit a low of $1.5214, its lowest level since June 5, and was on track for its second straight week of losses.
The euro rose to 73.20 pence, recovering from Thursday's low of 72.76 pence struck in the aftermath of Draghi's comments.
"Sterling is not enjoying this environment of weak risk sentiment, as euro/sterling merely settled lower rather than melting down yesterday after Draghi's performance," said John Hardy, head of FX strategy at Saxo Bank. "Sterling is only likely to rally if we see an improvement in the market mood."
Sterling has lost more than 3 percent on a trade-weighted basis in the last two weeks alone as investors have pushed back the timing of the first rate hike, given renewed market ructions and worries about a China-led global slowdown.
The earliest sterling money markets expect the BoE to move is around April/May next year. A month ago, they were pricing in a chance around beginning of next year.
Focus will now turn to the U.S. jobs report which is due later in the day. Traders said a non-farm payrolls report which is in line with expectations, or even a slightly better-than-expected reading, would be unlikely to alter expectations that the Federal Reserve will not raise rates this month.
Reporting by Anirban Nag; Editing by Toby Chopra