LONDON (Reuters) - Sterling edged lower on Thursday against both the U.S. dollar and the euro as a combination of weak business activity data and the risk of sub-zero interest rates weighed on the pound.
The currency remained under pressure as British five-year government bond yields fell below zero for the first time on Thursday, a day after Britain sold its first government bond with a negative yield.
Earlier on Wednesday, IHS Markit’s Flash Composite Purchasing Managers (PMI) data showed Britain’s economy flattened out a bit this month from its nosedive in April caused by the coronavirus lockdown, but remained in the grip of a severe contraction.
A drop in inflation fuelled speculation this week that the Bank of England (BoE) might cut interest rates below zero to bolster the economy.
Money markets are suggesting that benchmark policy interest rates in Britain will dip into negative territory for the first time later this year.
BoE Governor Andrew Bailey said he was less opposed to negative interest rates than he was before the pandemic.
“While currency markets remain bound by the broad risk sentiment, the pound is likely to underperform over the coming weeks on Brexit risks, while the country’s lockdown exit strategy is still up in the air,” Scotiabank strategists said in a note.
Brexit continues to deter pound investors, after the latest round of negotiations ended with scant progress on Friday.
Sterling weakened for a second consecutive day and has dropped nearly 3% against the dollar in May.
The pound was last down 0.04% versus the dollar at $1.2232, and down 0.16% against the euro to 89.57 pence after touching 90 pence, its weakest since March 27.
The pound is in the lower band of its recent trading range, as Britain remains one of the countries most affected by the pandemic. The UK’s death toll from COVID-19, the disease caused by the new coronavirus, has topped 43,000, by far the worst yet reported in Europe.
Reporting by Joice Alves; Editing by Mark Potter and Andrew Heavens