Sterling falls below $1.27 for first time since 1985

LONDON (Reuters) - Britain’s pound dipped below $1.27 for the first time since June 1985 on Wednesday, with fears of a ‘hard’ Brexit from the European Union also pushing the currency to a five-year trough against a broadly stronger euro.

Sterling has been buffeted for a fortnight by worries that Britain will prioritise curbing immigration over promoting trade in its divorce from the bloc, thereby gumming up labour markets, curbing foreign investment and leading to cutbacks by banks and other global companies.

That has been the broad takeaway for markets from this week’s conference of the ruling Conservative Party, and the pound has fallen past long-term lows set in early July in response, although there were signs of stability in morning trade in London.

Sterling hit a 31-year low of $1.2686 GBP=D4 after opening before recovering to $1.2717, marginally lower on the day. It fell as much as 0.5 percent to 88.43 pence per euro EURGBP=D4 before also clawing back some ground against the common currency.

The index of its broader strength touched its lowest since 2009 before recovering. =GBP

“Sterling has finally and belatedly responded to the heightened and prolonged Brexit uncertainty, notwithstanding a resilient UK economy and prospects of significant UK fiscal stimulus,” said Greg Gibbs, director of independent research house Amplifying Global FX Capital.

“The outlook remains negative, but it is risky to jump on the selling bandwagon.”

Better-than-expected readings of sentiment among construction and manufacturing purchasing managers this week have done little to turn the mood brighter. Services numbers were also better than forecast but not enough to pull it higher on the day.

Deputy Governor Ben Broadbent told a Wall Street Journal event that the Bank of England could raise interest rates if sterling fell sharply enough, but said that so far its moves have been orderly.

“It’s been a bit of a tug of war this morning between stronger data and the Broadbent comments which were on the dovish side and seem to be relaxed on the recent decline in sterling,” said Bank of America Merrill Lynch strategist Kamal Sharma.

“The focus remains on Article 50 and our bias remains to sell rallies in sterling.”

Article 50 refers to the EU constitutional paragraph under which Britain will lodge its formal declaration that it wants to leave the bloc, now expected by next March and triggering a two-year countdown to its departure.

A report on Tuesday commissioned by financial consultancy firm Oliver Wyman said Britain’s financial industry could lose up to 38 billion pounds ($48.3 billion) in revenue in a ‘hard’ Brexit that left it with restricted access to the EU single market.

That, and the threat of a squeeze on the foreign investment that Britain needs to fund its current account shortfall - now a record 7 percent of national output - have outweighed signs the economy was riding out the immediate impact of the Brexit vote this year.

“Sentiment is at such weak levels that the currency has failed to regain any of its losses,” said Jameel Ahmad, head of market research with retail broker FXTM. “I maintain my own view that sterling can conclude the year between $1.20 and $1.25.”

Reporting by Patrick Graham; Editing by John Stonestreet and Andrew Heavens