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Sterling hits fresh 2021 low vs dollar as economy loses steam

reuters.com · 11/11/2021 03:52
Sterling hits fresh 2021 low vs dollar as economy loses steam

By Julien Ponthus

- Sterling fell to its lowest level of 2021 against the dollar on Thursday as the British economy appeared to lose momentum and a surge in U.S. inflation boosted the greenback amid bets that the Federal Reserve would hike interest rates faster than expected.

Data released by the Office for National Statistics showed Britain's economy grew by 0.6% in September but estimates for previous months were revised lower, leaving the economy still smaller than it was in February 2020. nL8N2S22CO

In its November policy meeting, the Bank of England left its main interest rate unchanged at 0.1% having previously signalled it could raise it.

Markets are now pricing in a high probability of a December rate rise but uncertainty remains high. BOEWATCH.

ING market economist James Smith said he believed the slowing momentum of the British economy was unlikely to have a major influence on BoE policy makers for whom the recovery of the labour market is a key priority.

"It’s a close call between a December and February rate rise, though we think the former is more likely - especially if the jobs data brings the committee good news", he said in a client note.

A tighter monetary policy would help boost the British currency, economists say.

"The expectation, and eventual delivery, of a rate hike should allow sterling to recover its recent losses," said Dean Turner, an economist UBS Global Wealth Management.

On Thursday, sterling fell 0.24% versus the dollar GBP=D3to $1.3365, its lowest since December 2020.

Currency derivative markets are expecting more weakness for the pound with the cost of options to protect against further downside at its highest level since the 2016 Brexit referendum. nL1N2S20HW

Versus the euro, the pound EURGBP=D3 ticked down 0.1% at 85.66 pence.

Also rattling investors' nerves is the post-Brexit dispute between Britain and the European Union over trade with Northern Ireland.

British Brexit minister David Frost said on Wednesday that Brussels should stay calm and avoid embarking on "massive and disproportionate retaliation" if London follows through on its threat to trigger emergency unilateral provisions in the Brexit deal. nL8N2S15KF

Graphic: World FX rates in 2021http://tmsnrt.rs/2egbfVh

Graphic: Trade-weighted sterling since Brexit votehttp://tmsnrt.rs/2hwV9Hv

(Reporting by Julien Ponthus
Editing by Gareth Jones)