LONDON: The British pound fell to its lowest in nearly five months on Monday (May 21) as the US dollar surged and investors prepared for data that could determine whether the Bank of England raises interest rates this year.
A broad rally by the dollar and dwindling expectations that interest rates will rise have caused what had been one of the best-performing major currencies to give up all its 2018 gains.
Sterling slumped half a per cent to US$1.3392, its lowest since Dec 28, as the dollar soared on reports that the United States was putting its trade war with China "on hold".
The pound has also fallen against the Singapore dollar, reaching as low as £1 to S$1.8016 on Monday. This is the lowest since S$1.7980 on January 12.
Important data on the British economy, including inflation figures on Wednesday and gross domestic product on Friday, will be scrutinised by investors to gauge whether the BoE might tighten monetary policy as early as August.
"Markets have lost faith and conviction over BoE policy tightening, we now place a strong emphasis on UK data to guide market policy expectations," said ING FX analyst Viraj Patel. "Buckle up, it's going to be a bumpy ride for the pound this week."
Risks around the sort of post-divorce relationship Britain can agree with the EU weighed on the pound last week. But the biggest reason for sterling's fall has been a drastic shift in market expectations of when the BoE will raise rates.
Recent weak economic data mean markets are now not even pricing in a full 25-basis-point hike by the end of 2018. They had expected two 25 bp rises this year.
Concerns over Brexit also continue to dog the pound.
Scottish First Minister Nicola Sturgeon said on Sunday she would consider another vote on independence for Scotland when the British government offers some certainty over Brexit.
Adding to the political uncertainty, lawmakers from Prime Minister Theresa May's governing Conservative Party reportedly are bracing themselves for a snap autumn parliamentary election amid fears that the Brexit deadlock will become insurmountable.
Analysts at CMC Markets and Commerzbank, in notes to clients, predicted the pound would fall toward the $1.3300 level in the short term.
But Stephen Gallo, European head of FX strategy at BMO Financial Group, said that forthcoming data would show underlying strength in Britain's economy and the pound would rebound to $1.38 in the next three months.