Sterling losses snowball as dire data highlights Brexit toll

LONDON (Reuters) - Sterling extended its losses against the dollar on Friday, testing one-week lows after downbeat data on construction and consumer demand and heightening worries for an economy showing no sign of emerging from Brexit-linked gloom.

FILE PHOTO: UK pound coins plunge into water in this illustration picture, October 26, 2017. Picture taken October 26, 2017. REUTERS/Dado Ruvic

The pound also fell to a one-month low versus the yen as investors hunkered down in safe-haven assets such as the yen and gold following the U.S. killing of an Iranian commander which threatened to fuel fresh conflict in the Middle East.

The dollar index firmed, moving further off recent six month lows.

The British currency, which had rocketed to over $1.35 after the Dec. 12 general election, has been undermined since then by Prime Minister Boris Johnson’s vow to stick with an end-2020 deadline to negotiate a trade framework with the European Union.

The 11-month negotiation period could prove insufficient, many fear, potentially cutting Britain adrift without any trading arrangements in place.

Sterling fell as low as $1.3054 before trimming its losses to stand half a percent lower at $1.3079 by 1500 GMT. Against the euro, it was down 0.4% at 85.31 pence.

“Sterling is under downside pressure because of dollar strength, the uncertainty generated by post‑Brexit trade negotiations and a deeper contraction in the UK construction sector,” said Elias Haddad, a strategist at Commonwealth Bank of Australia.

An IHS Markit/CIPS survey showed a deepening construction downturn in December, driven by the sharpest drop in civil engineering activity since 2009. Growth in unsecured consumer lending meanwhile slowed to 5.7% in the year to November, the smallest increase since June 2014.

That comes on the heels of a Bank of England survey which showed on Thursday that 42% of UK businesses did not expect Brexit uncertainty to be resolved until 2021 at the earliest.

While money markets have not fully priced in a BOE interest rate cut for 2020, analysts said this could change, further undermining the pound.

“If we don’t see a more significant pickup in business sentiment and activity in coming months then it is difficult to see a reason for the pound to rally much towards the higher end of the 1.30-1.35 range we’d expected to see with a significant Conservative majority post-election,” MUFG analysts wrote.

Investors will have their eyes trained next week on Britain’s parliament which reconvenes on Tuesday to debate the EU divorce deal Johnson has agreed with Brussels.

The bill goes to parliament’s upper house on Thursday.

Reporting by Sujata Rao; editing by Nick Macfie