August 3, 2018 / 8:26 AM / 17 days ago

Sterling slides below $1.30 as Carney flags no-deal Brexit risks

LONDON (Reuters) - Sterling fell back below $1.30 on Friday after Bank of England Governor Mark Carney said there was an “uncomfortably high” risk of Britain leaving the European Union without a deal.

FILE PHOTO: A British Pound Sterling note is seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration/File Photo

The BoE raised interest rates from crisis-era lows on Thursday but that failed to boost the pound as the central bank also signalled it was in no rush to tighten policy further.

Raising questions over Thursday’s hike, growth in Britain’s crucial service sector slowed in July; the UK services Purchasing Managers’ Index (PMI) came in softer than all forecasts in a Reuters poll.

With less than eight months to go until Britain leaves the EU, the government has begun talking more publicly about the prospect of leaving without a formal agreement on its future relationship with the bloc.

The pound dropped 0.3 percent to an 11-day low of $1.2975, close to the 10-month low of $1.2958, before recovering slightly as the dollar fell. Sterling’s weakness this week has coincided with a broad rally in the greenback.

Against the euro, sterling recovered and was flat at 89.040 pence.

“I don’t think the case for hiking rates is very strong. The UK growth story is relatively weak,” said Tim Graf, State Street Global Markets’ EMEA Head of Macro Strategy. “I am still biased for some [sterling] downside.”

Britain’s economy has recovered from a weather-induced slowdown in the first quarter but sentiment is fragile.

Inflation remains above the BoE’s target of 2 percent but domestic sources of price rises are limited and have yet to feed through to significant upward pressures on wages, particularly given historically low levels of unemployment.

With the next six months set to be dominated by efforts to agree a deal on trade with the EU, money markets do not expect the BoE to hike rates again until late 2019.

Carney hinted on Friday that rates are likely to rise to around 1.5 percent over the next three years, based on financial market expectations.

“That’s not a prediction, that’s not a guarantee, but that’s not a bad rule of thumb given the current state of the economy and the momentum in the economy,” he told the BBC.

The market is pricing in one rate rise in 2019 for September, based on the money market “SONIA” curve.

“We remain more hawkish than the market...and see the next 25bp (basis point) move by the Bank being in February next year,” said George Buckley, an economist at Nomura.

“Much will likely depend on how the Brexit negotiations have fared between now and then — with the next six months crucially important in that respect.”

The pound, one of the strongest major currencies in early 2018, has lost 10 percent of its value since hitting a post-Brexit referendum high in April of $1.4377.

It has held up far better against the euro, although it is still down around 3.5 percent in the past four months.

Reporting by Tommy Wilkes; Editing by Catherine Evans and Hugh Lawson

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