Sterling falls for third day after heaviest falls in eight months

LONDON (Reuters) - Sterling fell for a third straight day on Tuesday, hitting two-week lows against a broadly stronger dollar even though investors remained wary of selling it down too far before this week’s Bank of England meeting.

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

Currency markets have been relatively calm compared with equity markets which are suffering their fourth straight day of falls, with Britain’s FTSE index down almost 2 percent and lower for the sixth day in a row.

But as the dollar has strengthened, sterling has struggled, losing as much as 0.8 percent at one point on Tuesday to hit a two-week low of $1.3838 before recovering to trade at $.3948 by 1704 GMT, still down 0.1 percent on the day, as the dollar pulled back again.

It has now fallen almost 3 percent since peaking at $1.4346 on Jan. 25 and is down more than 2 percent since Friday -- its worst three-day performance since June 2017.

Versus the euro, sterling dropped as much as 0.4 percent to a three-week low of 89.10 pence, before recovering to trade at 89.00 pence, still down 0.1 percent on the day.

The currency has been hurt by the general flight from risk and also weighed down by this week’s surveys confirming the poor shape of Britain’s economy and fresh tensions over its divorce negotiations with the European Union.

“Sterling is struggling and not bouncing well despite the comeback in risk appetite (in currency markets),” wrote Saxo Bank currency strategist John Hardy in a note to clients. “The former bull market is very compromised after the last couple of days.”

Economic growth is likely to slow to 0.3 percent in the first quarter, down from 0.5 percent in the last three months of 2017, financial data firm IHS Markit said.

And the European Union’s Brexit negotiator bluntly called on the British government to clarify what it expected its relationship with the EU to be after Britain leaves in March 2019. Without a customs union and outside the single market, barriers to trade are inevitable, Michael Barnier said.

“UK data showing weaker service sector output yesterday and only modest growth in retail spending have not helped sterling sentiment but the real driver of weakness has been broader market volatility,” Shaun Osborne, chief currency strategist at Scotiabank, told clients.

“Soft-ish data and ongoing focus on domestic political risks as PM May tries to steer her Brexit policies through parliament may drag on sterling’s performance near-term,” he added.

But sterling traders will also be wary of big bets before the Bank of England’s policy meeting on Thursday.

While the Bank is expected to leave interest rates unchanged, many analysts are now predicting a rate rise in May, especially after BoE Governor Mark Carney recently sounded a more upbeat tone on the economy.

The BOE also releases its inflation report on Thursday.

Carney has said wage growth is finally picking up and that the focus of the BoE is shifting back to tackling above-target inflation. Analysts reckon any further positive forecasts on the economy might prompt investors to add positions in the undervalued currency.

ING analysts predicted more sterling upside in the medium-term, having revised their end-2018 forecast to $1.45.

They cautioned however that “even if this week’s BoE meeting provides a hawkish tilt and global risk sentiment stabilises, we think any material upside will not be realised until markets have clarity on a Brexit transition deal.”

That was unlikely until closer to the 22-23 March EU leaders summit, they added.

Reporting by Saikat Chatterjee, Tommy Wilkes, Sujata Rao and Jemima Kelly; Editing by Catherine Evans and Richard Balmforth