Sterling sinks to 3-week low on economy, Tory conference

Sterling slipped to a near three-week low against the dollar on Monday as investors focused on underlying weakness in the British economy and the governing Conservatives gathered for what could be a fraught party conference. Data on Friday showed gross domestic product growth slowed to 1.5 per cent year on year in the second quarter while the current account deficit increased more than expectations.

"Sterling has come off its highs with the current Tory Party conference the focus of investors," Morgan Stanley strategists wrote in a daily note saying the pound was a sell due to political risks and weak UK economic balance sheets. Apologising for losing her party's majority at a snap election in June, Prime Minister Theresa May said on Sunday she had the right strategy to lead Britain and win a Brexit deal. Sterling posted its biggest monthly rise in more than two years in September, gaining more than 1.6 per cent against the dollar after the Bank of England signaled a rate increase in the coming months. The Bank has come under pressure in recent weeks as doubts emerged whether the struggling economy could stomach a rate hike. On Monday, sterling fell half a percent to a near three-week low of $1.3323 against the dollar, its lowest level since Sept. 14, according to Thomson Reuters data. Against the euro, hit by Sunday's violence-marred independence referendum in the Spanish region of Catalonia, sterling was little changed at 88.09 cents per euro. The dollar started the month on a high on Monday, underpinned by higher US yields with an index tracking its performance against a trade-weighted basket of currencies rising half a percent to 93.53.

The pound was the world’s top-performing major currency in September, having its best month in more than two years on expectations of a Bank of England interest-rate increase in November.

“I suspect that’s the bulk of the strength sterling will get from the rate hike,” said Standard Bank strategist Steven Barrow, who sees the pound falling to $1.28 by year-end, from around $1.34 on Sept. 29. “By the time we get to the actual hike itself, the market is more likely to react in a negative way.”