Mood turns sour for sterling, currency drops 1%

LONDON (Reuters) - The British pound fell more than 1% on Friday on a mix of bad news on the latest Brexit negotiations and gains for the U.S. dollar that combined pushed sterling below $1.31.

FILE PHOTO: Pound coins are seen in the photo illustration taken in Manchester, Britain September 6, 2017. REUTERS/Phil Noble/Illustration/File Photo

Britain and the European Union made scant progress towards a deal on future ties in talks this week, and their chief negotiators blamed each other for the stalemate as time ticks down to an end-of-year deadline.

A rising U.S. dollar pushed the pound down 1.2% to a one-week low of $1.3059. It was also down 0.4% against the euro at 90.12 pence.

Also on Friday came news that Britain’s public debt went above 2 trillion pounds for the first time in July as the government ramped up public spending to cope with the coronavirus pandemic and tax revenues fell.

A large pile of debt, double deficits and an insecure relationship with its biggest trading partner could leave the UK vulnerable to investment outflows and money managers and investors look for better opportunities elsewhere.

And Britain’s official budget forecasters raised their estimate for the size of the country’s public debt pile at the end of the current financial year, after data showed earlier on Friday that it had passed 100% of annual economic output for the first time.

Thin summer trading on a Friday could mean that moves may be exaggerated, however.

“The latest round of talks on a trade deal between the UK and the EU have drawn to a close with no breakthrough agreement in sight. Unless this status quo alters in the weeks ahead, EUR/GBP is likely to be pushed higher,” said Jane Foley, senior strategist at Rabobank.

“We see risk of a move in EUR/GBP to 0.92 on a two to three month view if a compromise on trade with the EU remains elusive,” she said.

The pound has lost earlier strength on the back of stronger than expected economic data.

Earlier in the day the pound rose to a 1-1/2-month high versus the common currency and inched towards an eight-month high against the greenback after UK retail sales numbers for July came in much higher than expected.

Year-on-year sales rose instead of falling as in the previous month while economists polled by Reuters had predicted no growth. Month-on-month numbers also rose higher than expectations, though not as much as June.

“This is supportive for sterling and given the general weakness of the U.S. dollar, further gains for cable (sterling/dollar) over the short-term are possible,” said Derek Halpenny, head of research at MUFG, adding that “there will be an obvious high level of caution in reading too much into this impressive performance.”

On top of that, the recovery among British businesses from the shock of the COVID-19 pandemic quickened again in August, the IHS Markit/CIPS UK Composite Purchasing Managers’ Index (PMI) showed on Friday.

The index shot up to a nearly seven-year high of 60.3 from 57.0 in July, far above the 50 threshold for growth, keeping sterling supported.

Reporting by Olga Cotaga; Editing by Kim Coghill, Elaine Hardcastle and Hugh Lawson