Sterling steadied on Friday but was on track to record its worst week against the euro in nine months, with the single currency rallying across the board on bets that the European Central Bank was on track to tighten monetary policy next year.
The pound sank to an eight-month low of 89.91 pence EURGBP=D3 earlier in the day, extending the falls of the previous day after ECB chief Mario Draghi said possible changes to the central bank’s expansive stimulus programme would be discussed in the autumn.
Though he kept the door open to further easing, investors interpreted Draghi’s comments as less dovish than previous ECB meetings and the euro shot up broadly, hitting its highest levels in almost two years against the dollar.
The pound has lost almost 2.5 percent against the euro this week – its biggest losses since last October.
Against the dollar, sterling was trading up around 0.1 percent at $1.2990 GBP=D3, having earlier in the week traded above $1.31 but having slipped on weaker-than-expected inflation data, which poured cold water on expectations that the Bank of England could hike interest rates in the coming months.
“Sterling’s weakness should not be underestimated in the current dollar-selling backdrop,” said ING currency strategist Viraj Patel. “The stagflation warning signs are flashing for the UK economy after this week’s data, while any ‘soft’ Brexit euphoria is slowly beginning to fade as the reality of difficult negotiations begins to sink in.”
Patel added that the pound would continue to underperform, with the euro likely to test the 90-pence level, and with the currency likely to stay under $1.30.
Investors are watching Brexit negotiations between Britain and the European Union closely, with any signs that Britain will lose its preferential access to the single market, or that it will not get a deal with the EU, likely to knock the currency.
“While it is certainly possible that sterling could remain subdued this summer, the risk is political crosscurrents could leave the currency exposed to sharp moves to the downside,” wrote BNY Mellon strategists in a note to clients.
“Given where GBP is currently trading it may therefore be worth keeping a close eye on political developments this weekend.”