The British pound languished near a four-month low on Wednesday as the dollar rallied and traders sold sterling the day before a Bank of England meeting where interest rates are expected to be kept on hold.
UK economic data have taken a turn for the worse in recent weeks, causing traders to almost discount the possibility of an interest rate hike on Thursday.
In addition, worries about conflict within the British government over what its relationship with the European Union should look like after Brexit have hurt sterling.
Traders will scrutinise Thursday’s decision for any indication of whether a rate hike is still likely this year.
A narrow vote split among the nine-member Monetary Policy Committee, led by Governor Mark Carney, could prepare markets for a hike in August.
But analysts said the BoE could find it challenging to explain its future approach to a market that has within a month cut its expectation of a May hike from 90 to around 10 percent.
“The BoE’s hands are tied at tomorrow’s meeting and it will be a Herculean task to signal credibly to the market when it intends to implement the planned rate hike,” Antje Praefcke, a currency strategist at Commerzbank in Frankfurt, wrote in a note to clients.
“I cannot see much positive momentum for sterling in this whole situation,” she said.
However, analysts at ING said in a note that the pound’s fall in recent weeks looked overcooked, and that they remained bullish for the medium-term.
The pound was down 0.2 percent on Wednesday at $1.3520, close to Tuesday’s lows — its weakest since Jan. 11.
Sterling is at risk of losing its status as one of the best performing G10 currencies this year, partly because investors have recently started betting on the dollar rising on the strength of higher interest rates.
Data released late last week showed investors had cut their net long positions in the pound over the past fortnight by the biggest amount since March 2017, although net long positions remain near a four-year high.
Tensions within Britain’s governing Conservative Party over how to agree terms of exit from the European Union have also re-emerged as a political risk for the pound.
Foreign Secretary Boris Johnson described as “crazy” a proposed customs partnership that is believed to be Prime Minister Theresa May’s preferred option for relations with the EU after Britain leaves the bloc.
Against the euro, sterling gained 0.1 percent to 87.510 pence as the stronger dollar pulled the single currency down across the board.