The British pound held within striking distance of a two-month low on Wednesday before a Bank of England decision on Thursday against the backdrop of a darkening outlook for the economy.
While the central bank is widely expected to hold fire, policymakers are likely to conclude that downside risks to the economy are rising for the economy due to rising Brexit uncertainty and renewed restrictions on social activity.
Geoffrey Yu, senior EMEA market strategist at BNY Mellon said the central bank will now have to contend with Brexit and fiscal uncertainty and the pound’s recent spell of weakness is warranted.
“A lack of a trade deal after the Brexit transition period is complete will certainly change the BoE’s conditional assumptions on monetary policy,” he said in a note to clients.
Sterling had its worst week in six months last week, as investors grew more pessimistic about the chances of a Brexit deal being reached before the December 2020 deadline.
After throwing Brexit trade talks into disarray by proposing legislation that would break international law by breaching parts of the Withdrawal Agreement, Prime Minister Boris Johnson faces a rebellion from his own lawmakers as the proposed bill, called the Internal Markets Bill, moves through parliament this week.
The pound was 0.1% lower at $1.2877 in early London trading, not far from a late July low of $1.2768 hit last week.
Against the euro, the pound slipped 0.1% to 92.01 pence.
Economic concerns also weighed after Tuesday’s data showed Britain’s unemployment rate rising for the first time since the coronavirus lockdown began in March.
That prompted investors to ratchet up expectations that the pound is likely to remain volatile in the coming weeks with one-month volatility gauges trading higher than their one-year counterpart on Wednesday.
Reporting by Saikat Chatterjee; Editing by Emelia Sithole-Matarise