Pound heads for worst week since mid-May, public debt surges

LONDON (Reuters) - Sterling was on track for its worst week since mid-May after fresh data on Friday showed government borrowing had hit record highs, more evidence that the coronavirus-stricken economy was a long way from recovering.

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

Britain’s public debt exceeded economic output for the first time since 1963, when the country was still paying off debt from World War Two.

“UK public sector finances for May show how heavy the cost of the pandemic has been in the first two months of the fiscal year,” said Kit Juckes, chief global FX strategist at Societe Generale.

The pound was down 0.4% against the dollar at $1.2378 by 1515 GMT, its lowest since June 1. Against a weakened euro, the pound was last down 0.4% at 90.53 pence, a three-month low.

Graphic: Sterling heads for a second straight weekly loss

The euro weakened as European Union leaders made no progress in a video-conference on Friday on a 750 billion-euro ($840.8 billion) coronavirus recovery fund that has divided them bitterly for weeks.

“We still think EUR/GBP is likely to spend most of the next few months above 0.90,” Societe Generale said in a note.

Earlier on Friday, the pound rose briefly on data showing retail sales rebounded in May more than expected after April’s slump. But traders soon shifted their attention to the surge in UK public debt.

Sterling was already trading below the $1.25 mark on Thursday after it had slumped more than 1% as the Bank of England increased its bond-buying programme by 100 billion pounds ($124 billion) to bolster the coronavirus-hit economy.

Brexit-related risks also continued to weigh on sterling. British Prime Minister Boris Johnson told visiting French President Emmanuel Macron on Thursday that talks on a post-Brexit deal cannot drag on into the autumn.

German Chancellor Angela Merkel also said the EU and Britain needed to reach a deal by the autumn. Britain left the EU on Jan. 31, but talks on future relations have so far made little progress.

On a brighter note, Britain’s chief medical officers said the COVID-19 threat level should be lowered one notch.

Graphic: World FX rates in 2020 here

Graphic: Trade-weighted sterling since Brexit vote here

Editing by Larry King and Alex Richardson