Sterling hits 18-day low as equity slide hurts riskier currencies

The British pound fell on Monday, hitting its lowest in 18 days versus the U.S. dollar, as investors sold riskier assets amid expectations of Fed tightening, mounting tensions with Russia and falling stocks.

The market is bracing for a U.S. Federal Reserve meeting this week that could signal the removal of its vast stimulus programme.

The United States also said on Sunday it was ordering diplomats’ family members to leave Ukraine, in one of the clearest signs yet that American officials are bracing for an aggressive Russian move in the region.

The dollar rose and riskier currencies such as the British pound and Australian dollar suffered.

British business activity grew less than expected in January, with the Purchasing Managers Index (PMI) hitting an 11-month low, but cost pressures stayed high.

“The PMIs aren’t telling us much new. Growth conditions were impacted by the arrival of Omicron, supply chain pressures are starting to ease, and labour market shortages/disruptions continue to fuel a more persistent inflation backdrop,” Simon Harvey, head of FX analysis, said.

Investors expect the Bank of England to hike rates in February, after data showed on Wednesday that UK inflation rose faster than expected to its highest in nearly 30 years in December.

The pound hit an 18-day low of $1.3485 at 1208 GMT, down 0.5% on the day.

Versus the euro, it edged down around 0.1%, at 83.81 pence per euro at 1223 GMT .

The pound also hit a one-month low versus the Japanese yen, after the pair tumbled 1.4% last week.

POLITICAL RISK

An investigation into parties at the official residence of British Prime Minister Boris Johnson during Britain’s 2020 lockdown is due to be published this week.

“We saw early in the European trading session today that pressure on the pound was largely centred on the increased probability of Johnson’s resignation this week, but as the morning has gone on a broader USD bid along with deteriorating PMIs has extended the pound’s losses,” Monex Europe’s Simon Harvey said.

Other analysts said the investigation had not had an impact on the pound.

“We do not expect heightened political uncertainty to materially impact pound performance given there is unlikely to be any near-term change in government policies,” currency analyst Lee Hardman wrote in a note.

The strategists Chris Turner and Francesco Pesole told clients: “Politics has yet to hit GBP on the view that even if PM Johnson were to resign, Chancellor Sunak would be seen as a safe pair of hands as an alternative.”

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