Weak pound hits two-week low vs euro after oversized ECB hike

By Samuel Indyk

LONDON (Reuters) -The British pound hit a two-week low against the euro on Thursday after a larger-than-expected rate hike from the European Central Bank lifted the single currency, while public borrowing figures added to the woes facing the British economy.

A surge in debt costs - pushed up by soaring inflation to twice their previous monthly peak - added to Britain's budget deficit in June, which was its highest since April 2021, data showed.

"The pound has slipped back after the latest public sector borrowing numbers," said Michael Hewson, chief market analyst at CMC Markets UK.

"The continued rise in headline inflation, and the Bank of England’s ambivalence towards it certainly isn’t helping in this regard."

The figures will be a concern for the remaining candidates vying to replace Boris Johnson as British Prime Minister.

On Wednesday, the race was whittled down to two candidates, with former finance minister Rishi Sunak and foreign secretary Liz Truss making it through to the last round and set to battle it out over the summer for the votes of Conservative Party members.

Meanwhile, sterling traders were also keeping an eye on the developments in Frankfurt and Rome where a larger-than-expected rate hike from the European Central Bank outweighed the resignation of Italian Prime Minister Draghi and lifted the euro against the pound.

Some analysts noted that price action in the pound was being affected by the events in Europe and the market's general appetite for risk.

"GBP price action looks like a function of the broader risk environment, which is currently taking cues from developments in Europe," said Simon Harvey, head of FX analysis at Monex Europe.

Against the euro, the pound dropped as much as 1%, hitting a two-week low of 85.85 pence before paring some losses. At 1450 GMT, the pound was down 0.4% against the single currency at 85.35 pence.

Sterling slid 0.3% against the dollar to $1.1947 but remained above the 28-month low hit last week.

(Reporting by Samuel Indyk; Editing by Edmund Klamann and Andrea Ricci)