A trade-weighted basket of currencies on Monday, undermined by growing evidence of a weakening economy that could prompt further monetary easing by the Bank of England, sterling fell to a one-month low against the euro.
Analysts also said a recovery in the euro on expectations the European Central Bank may take action to ease the euro zone’s debt crisis has refocused investors minds back onto poor UK economic fundamentals.
The euro rose 0.5 percent to a high of 79.63 pence , after posting its biggest weekly gain against the pound since late February last week. This pushed sterling’s trade-weighted index to a low of 83.2, its weakest since July 5.
A survey on Wednesday showed British house prices fell more than expected last month, the latest in a string of poor UK economic data.
It followed surveys last week showing growth in Britain’s dominant services sector slowed last month while manufacturing activity shrank. These suggest a poor start to the third quarter after the economy contracted more than expected in the first half of the year.
“After the latest GDP figures there is a sense that the economy is doing worse than going sideways, it is in a proper recession which is not helping the economy,” said Michael Derks, currency strategist at FXPro.
He added that an ebbing in safe haven flows into sterling was also weighing on the currency.
Traders said if the euro breaks above its 55-day moving average around 79.70 this would pave the way for a move back above 80 pence.
BOE INFLATION REPORT AHEAD
Market players were also jittery ahead of the BoE’s quarterly inflation report on Wednesday, when the bank gives its latest forecasts for growth and inflation, which may open the door to more quantitative easing or an interest rate cut.
Analysts at Barclays recommended selling sterling against both the euro and the dollar, citing expectations a dovish inflation report and that economic data will “continue to surprise to the downside, following the sharp downside surprise from GDP growth”.
Citi analysts similarly expect economic weakness to weigh increasingly on the pound, particularly against the euro.
“We suspect given receding tail risks within the Eurozone and the necessity for more accommodative policy in the UK, an extension in the recent rebound in euro/sterling could well be on the cards,” they said in a note to clients.
Against the dollar, sterling was down 0.4 percent at $1.5584, with traders citing option expiries at $1.5600.
The ECB said last week it may soon resume its programme of buying government bonds of struggling euro zone countries, leading to some optimism that European authorities would act to dampen bond yields in Italy and Spain.
“It is now time to turn tactically bullish euro and expect it to hit 81 pence against the pound,” said George Saravelos, currency strategist at Deutsche Bank.