Sterling slips to seven-week low on worries over Brexit transition

LONDON (Reuters) - Sterling slipped to a seven-week low against the dollar on Thursday, as investors sold the pound on worries a Brexit transition deal might not be reached this month.

FILE PHOTO - An English ten Pound note is seen in an illustration taken March 16, 2016. REUTERS/Phil Noble/Illustration/File Photo

British Prime Minister Theresa May will lay out her views on how to keep trade open between all of the United Kingdom and the European Union in a key speech on Friday, just two days after the EU’s chief negotiator Michel Barnier struck a downbeat tone on the progress of Brexit talks so far, weakening sterling.

Sterling has struggled to build on a rally earlier this year amid a resurgence in political risk centred on Brexit, and a broad rebound in the dollar. It suffered its worst month since October 2016 in February, as the greenback strengthened across the board.

Warnings by Barnier that a transition deal - designed to give Britain and the EU more time to agree the terms of their future relations - was not guaranteed have rattled investors.

On Thursday, the pound slipped 0.4 percent to as low as $1.3712, its weakest since Jan. 12.

“This is mostly about the rebound in the dollar, which is benefiting from more risk-averse trading conditions on the back of more hawkish comments from Powell,” said MUFG currency strategist Lee Hardman, referring to a testimony from new Federal Reserve Chair Jerome Powell.

“But there are (also) pound-specific negative factors - the Brexit risk has picked up in the past week or so, and the comments yesterday from Barnier don’t give you much confidence that a transition deal will be reached this month,” he added.

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Against the euro, sterling traded down 0.2 percent at 88.77 pence per euro.

A closely watched gauge of British factory activity slipped to its lowest in eight months in February as output expanded more slowly, a survey also showed on Thursday.

But politics remains front and centre for sterling.

“The pound is weakening basically at the moment on politics,” said Michael Hewson, chief market strategist at CMC Markets.

Hewson said he believed sterling remained in an uptrend that it began early last year, but that it could fall to as low as below $1.34 as investors book profits and political risk overshadows any positive economic developments.

The market is pricing in a May interest rate hike by the Bank of England, although the central bank has said its monetary outlook is dependent on smooth negotiations with the EU over Brexit and a healthy economy.

Reporting by Tommy Wilkes; Editing by Catherine Evans and Mark Potter