Pound extends fall, on course for five months of losses

By Lucy Raitano

LONDON (Reuters) -The British pound fell against the U.S. dollar on Tuesday, wrapping up five months of straight losses for the currency as Britain's murky growth outlook and uncertain interest rate trajectory continues to weigh on sentiment.

At 1423 GMT, the pound was 0.54% lower against the dollar at $1.2581, having extended earlier losses throughout the day.

Despite the weakness, sterling remains well off its mid-May lows when it touched its lowest level since May 2020.

Earlier this month the Bank of England raised interest rates to their highest level since 2009, as inflation soared to a four-decade high amid warnings that Britain risks a recession.

"There is a fairly negative psychology behind the pound related to poor expectations around growth," said Jane Foley, head of FX at Rabobank London.

"Relative to other countries in the G7 those very forecasts suggested the UK economy is unlikely to perform well over the next couple of years and that's the underlying reason for sterling’s poor performance."

Sterling regained ground on the back of strong labour market and CPI data, but the focus remains on soaring inflation and how the central bank will manage future potential rate hikes.

Foley said Britain was getting the worst of both worlds when it came to inflation triggers.

"It is situated in Europe so it deals with the brunt of the natural gas price hike, and that even predates the war," she said. "So we’ve had high gas prices that the U.S didn't have, and unlike the euro zone there have also been signs of wage inflation.”

Bank of England data on Tuesday showed credit card borrowing in Britain rose last month at the fastest annual rate since 2005, possibly reflecting a worsening cost-of-living squeeze that may now be starting to slow the housing market.

Worsening economic data has pushed money markets to readjust their rate hike expectations lower in recent weeks..

As expectations for Federal Reserve rate hikes were revised down, the dollar index weakened from its mid-May peak, providing a lift for sterling which is influenced strongly by movements in the dollar.

But recessionary risks continue to weigh on the pound, and are also redrawing expectations for future interest rate moves by the Bank of England.

"The biggest story is that the market is too aggressive on pricing the Bank of England tightening cycle," said Chris Turner, head of FX Strategy at ING. "The market prices the bank rate at 2.5% next summer, we think the BoE will probably pause this year at 1.75%."

Against the euro, sterling was 0.16% higher at 85.095 pence.

(Reporting by Lucy Raitano; Editing by Kirsten Donovan and Alison Williams)