January 15, 2016 / 9:48 AM / 2 years ago

Sterling hits 5-1/2 year low, traders eye $1.43

LONDON (Reuters) - Sterling hit a 5-1/2 year low against the dollar on Friday, putting it on track for its third straight week of losses, as investors grew increasingly concerned about Britain’s economic outlook and pushed back chances of a rate hike to early 2017.

Wads of British Pound Sterling banknotes are stacked in piles at the GSA Austria (Money Service Austria) company's headquarters in Vienna July 22, 2013. REUTERS/Leonhard Foeger

Worries about a referendum on Britain’s membership of the European Union have also intensified and weighed on sterling in recent weeks. Prime Minister David Cameron has promised a referendum by the end of 2017, though it may come as early as June this year.

With the outcome unclear, investors are bracing for volatility and these concerns have also been central to sterling’s weakness since the start of December.

The pound fell 0.5 percent to $1.4337, its weakest since May 2010, having lost more than 6 percent in the past six months with traders saying more losses were likely near term.

The euro rose 0.7 percent to 75 pence, not far from a one-year high of 76.06 pence hit on Thursday.

“While weakness in sterling/dollar has accelerated, we think the current downtrend may run a bit further,” TD Securities’ European head of currency strategy, Ned Rumpeltin, said.

“We see scope for spot to challenge support at $1.4230 before the risk of a more meaningful correction arises. A further extension lower could put long-term support around 1.35 into view,” he said.

The pound’s drop accelerated this week after data showed British industrial output suffered its sharpest fall since early 2013 in November. That added to doubts about the strength of Britain’s economy and encouraged bets that the Bank of England (BoE) would not raise interest rates any time soon.

Analysts said volatility in global markets, sliding oil prices and subdued inflation outlook in Britain meant investors are pricing in a chance of a rate hike only in early 2017, having factored in last week the chance of a move in late 2016.

The minutes from the BoE’s latest policy meeting showed policymakers expect the recent plunge in oil prices will weigh a bit on British inflation in the coming months but said it remained unclear if the impact would be lasting.

“The wait-and-see approach was perhaps justified as the BoE highlighted the fact that the oil price drop was more supply related and would therefore have a net benefit for the UK economy,” Bank of Tokyo Mitsubishi said in a note.

Editing by Louise Ireland

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