Britain’s pound slipped towards a seven-month low against the euro on Wednesday, hurt by political uncertainty and weaker-than-expected earnings numbers that underscored the economic challenges Britain faces as it leaves the European Union.
Against a broadly weaker dollar, sterling was up on the day, topping $1.28 for the first time since last week’s UK election results.
The dollar slipped on weaker-than-expected inflation and retail sales data, with traders betting the U.S. Federal Reserve would strike a cautious tone when it concludes its meeting on policy later in the day.
The pound had earlier been recovering from its almost 3 percent slide against the euro since the Conservatives unexpectedly lost their parliamentary majority last week.
It was bought on hopes the outcome of the vote could spell a “softer” Brexit in which Britain keeps preferential access to – or even stays in – the European single market.
But data showing British workers’ earnings after inflation are shrinking at the fastest pace since 2014, squeezing consumers the country relies on for economic growth, pushed sterling down against both the euro and initially the dollar before the U.S. data came in.
On Tuesday, figures showed a rise in inflation to its highest level in four years, adding to British consumers’ pain.
“Prices are growing faster than pay, which doesn’t bode well for real-terms consumer spending, especially with the household savings ratio being so low,” said RBC economist Sam Hill.“We maintain the view that the MPC (Bank of England monetary policy committee) will stick with the choice of a longer period of above-target inflation.”
A BBC report that a deal to obtain support from Northern Ireland’s Democratic Unionist Party, which Prime Minister Theresa May needs to form a government, would not now be signed on Wednesday, drove the pound further down.
It weakened to as much as 88.355 pence per euro, close to the trough of 88.665 pence hit on Monday – which was its weakest since Nov. 9 – before easing back a little.
Against the dollar, the pound had earlier fallen to as low as $1.2724, but it was up 0.4 percent at $1.2806 later.
It topped $1.30 last month for the first time since September on the view that May’s Conservatives were likely to increase their majority in Thursday’s election, and in so doing strengthen Britain’s negotiating position in EU exit talks.
But the Conservatives’ failure to achieve such an outcome has once again increased the political risk perceived by investors, weighing on the currency.
“The risk that the UK may leave the EU without a deal and the fact that growth is likely to continue to slow suggest it is still too early to change our negative view on the pound,” wrote SEB currency strategist Richard Falkenhall in a research note.
“However, if the British government softens its stance when negotiations with EU begin, or if the chance of a constructive agreement. ..were to increase for some reason, we would argue the Sterling would probably be too cheap.” (Editing by Jeremy Gaunt.)