LONDON (Reuters) - Sterling slipped to a four-day low under $1.22 on Friday, hurt by expectations that Britain’s economy is likely to suffer from a hardline stance by the European Union in negotiations on the country’s exit from the bloc.
British Prime Minister Theresa May, who is in Brussels to attend her first EU summit since Britain’s vote to leave the bloc in June, tried to reassure EU leaders over Brexit but was told by French President Francois Hollande to prepare for tough talks.
Sterling had been trading just above $1.22 GBP=D4 for most of the European trading session, but fell to as low as $1.2171 after U.S. traders arrived at their desks. By 1410 GMT it was trading at $1.2198, down half a percent on the day.
“Obviously the dollar’s been on the front foot today and sterling has taken another dip since the U.S. came in,” said a trader with one large international bank in London.
“Looking at the price action, there may have been some orders go through on sterling yen. $1.22 was a level on the day after the flash crash, so there is the feeling that somewhere in the mid $1.22s was a pivot level for the pound and we have broken that. I would stress today this is happening in pretty thin volumes.”
The pound has fallen nearly 18 percent since the June vote with losses accelerating in October after May raised the spectre of a “hard” Brexit, where the government will negotiate for an exit that favours tighter immigration controls over free trade, likely curbing foreign investment needed to fund Britain’s huge current account deficit.
“Investors have started to price in the impact of a hard Brexit on the economy and the current account driven by the political stalemate between the UK and the rest of Europe. In addition, there is concern that an inflation surge will prevent the BoE from supporting the economy,” said Nick Kounis, head of macro research at ABN-Amro.
Sterling’s slide has sent inflation expectations soaring, driving investors to reassess chances of further easing by the Bank of England this year. It also led some analysts to say that foreign investors were demanding an extra premium before buying gilts.
Britain’s 10-year gilt yield was little changed in early trade at around 1.09 percent GB10YT=RR, holding below roughly four-month highs hit on Monday at 1.22 percent.
Against the euro, the pound was flat at 89.185 pence EURGBP=D4. The single currency had been hurt on Thursday by European Central Bank chief Mario Draghi’s comments, as he quashed speculation that the ECB was considering how to wind down bond purchases.
“The euro is still licking its wounds after yesterday’s ECB announcement where Draghi made a forceful statement against any tapering,” said analysts at RBC Capital Markets.
Reporting by Anirban Nag, Patrick Graham and Jemima Kelly