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

LONDON: 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.
The pound plunged to a low of 1.2085, its weakest since January 2017. It came after the US 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 0.5pc at $1.2098, while against the euro it fell to 91.33 pence.
The pound shed more than 4pc 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 index, which measures sterling against its trading partners’ currencies, the pound has dropped to its weakest since early November 2016, having fallen more than 7pc since May.
The BoE kept rates on hold at 0.75pc 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 1.3pc for 2019 and 2020, down from 1.5pc and 1.6pc 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 (4.4pc 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.

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