August 1, 2019 / 8:17 AM / 4 months ago

Sterling sinks to $1.21 as BoE cuts growth forecasts before Brexit

LONDON (Reuters) - Sterling sank to a 30-month low on Thursday below $1.21, hurt by a stronger dollar, renewed worries about a no-deal Brexit and reduced Bank of England forecasts for British economic growth.

FILE PHOTO: Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger

The pound plunged to a low of 1.2085 GBP=D3, its weakest since January 2017. It came after the U.S. Federal Reserve's less dovish than expected policy meeting on Wednesday spurred dollar buying, and before the BoE kept interest rates on hold but cut its growth forecasts amid mounting Brexit risks.

Sterling was last down 0.5% at $1.2098, while against the euro it fell to 91.33 pence EURGBP=D3.

The pound shed more than 4% of its value in July, its worst month since October 2016, following new Prime Minister Boris Johnson’s vow to leave the European Union on Oct. 31 whether or not a transition deal can be agreed with Brussels.

This sparked panic among investors that Britain was on course for a disorderly divorce after 46 years in the world’s largest trade bloc.

On the Bank of England’s trade-weighted GBPTWI=BOEL index, which measures sterling against its trading partners’ currencies, the pound has dropped to its weakest since early November 2016, having fallen more than 7% since May.

The BoE kept rates on hold at 0.75% on Thursday but gave no indication it was considering lowering interest rates like other central banks.

The pound was little moved by the announcement, hovering around the $1.21 mark.

BoE Governor Mark Carney said “profound uncertainties” over the future of the global trading system and Brexit were weighing on UK economic performance.

The BoE forecasts assume Britain avoids a Brexit shock, but it still cut its growth forecasts to 1.3% for 2019 and 2020, down from 1.5% and 1.6% respectively in its last forecasts in May.

“Sterling remains vulnerable to a further escalation in Brexit tensions and we anticipate the market will likely discount higher risks of a ‘no deal’ outcome in the weeks ahead,” said Roger Hallam, Currency Chief Investment Officer at JP Morgan Asset Management.

“The UK’s significant current account deficit (4.4% of GDP) also makes the UK particularly vulnerable to a deterioration in Brexit sentiment,” he said in emailed comments.

Money markets are pricing in a 25 basis point rate cut by the BoE by the end of January 2020.

Also weighing on sterling are signs of a slowdown in the British economy.

British manufacturers’ output fell by the most in seven years in July, the Purchasing Managers’ Index survey for the manufacturing sector showed, as Brexit jitters and weaker global demand choked off growth.

The July survey had a reading of 48, the same as the June reading but slightly better than economists’ forecasts.

Kit Juckes, currencies analyst at Societe Generale, said that amid “the ongoing political carnage as Boris Johnson lays out his Brexit plans and the weakness of the economy, there’s nothing to like about the pound.”

Reporting by Tommy Wilkes; Additional reporting by Olga Cotaga; Editing by Mark Heinrich and Andrew Cawthorne

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