LONDON (Reuters) - Sterling fell to a fresh four-month low on Tuesday as the dollar extended its rally and investors continued to trim their pound holdings before a Bank of England meeting on Thursday, when the central bank is expected to keep interest rates on hold.
Weaker-than-expected data on UK house price growth and resurfacing worries about divisions within the British government about what the relationship with the European Union should look like after Brexit also hit sterling.
The pound has fallen heavily in recent weeks on expectations the BoE would not, as earlier believed, tighten monetary policy because of a relatively weak economy and as investors piled into a rallying dollar.
The British currency on Tuesday dropped to $1.3485, its weakest since Jan. 11 and leaving what had been one of the best performing G10 currencies this year down for 2018.
Positioning data released late last week shows investors have cut their net long positions in the pound over the past fortnight by the biggest amount since March 2017, although net long positions remain near a four-year high.
David Madden, analyst at CMC Markets, said the collapse in expectations for a BoE hike when it meets on Thursday, from an 80 or 90 percent chance a month ago to around 10 percent today, was the primary reason for sterling’s weakness.
“It has all happened at a time when the dollar index is hitting multi-month highs,” he said. “Expectations were probably too high that the BoE was going to raise rates.”
Tensions within Britain’s governing Conservative Party over how to agree terms of exit from the European Union have also re-emerged as a key political risk for the pound.
Prime Minister Theresa May faces a tough battle as her party attempts to steer flagship legislation through Britain’s upper house of parliament.
Her foreign minister, Boris Johnson, has described as “crazy” a proposed customs partnership that is believed to be May’s preferred option for relations with the EU after Britain leaves the bloc, underlining deep divisions within her top team about future ties with the EU. (Full Story)
ING analysts said in a note that while the focus would be on the passage of Brexit legislation, sterling against the euro remained steady for now.
Against the euro sterling gained 0.2 percent to 87.810 pence on Tuesday as the stronger dollar pulled the single currency down across the board.
Reporting by Tommy Wilkes; Editing by Gareth Jones