April 26, 2018 / 4:09 PM / a month ago

Euro posts biggest drop in 2 weeks vs sterling as caution grips

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

By Saikat Chatterjee

April 26 - The euro was on track for its biggest daily drop in two weeks against sterling on Thursday as investors became more cautious about the outlook for the single currency, although British economic growth data on Friday could quickly change the picture.

With the U.S. dollar resurgent, ECB President Mario Draghi’s acknowledgment of a “pull-back” in the euro zone economy from exceptional growth readings seen around the turn of the year dragged on the euro.

“There is a very gradual repricing going on in the euro/sterling pair thanks to Draghi’s cautious comments and we may test 85 pence on the pair,” said Gavin Friend, senior markets strategist at NAB in London.

The euro fell half a percent against sterling to 86.92 pence, its biggest daily drop since April 12 and threatened to break out of the broad 86-90 pence range it has been stuck in all this year.

Against the dollar, sterling consolidated losses at a five-week low before a central bank meeting next month that may see the Bank of England raise interest rates, and as the dollar rebounded against its rivals on strong data.

The number of Americans filing for unemployment benefits dropped to the lowest level in more than 48 years last week and the goods trade deficit tumbled in March on strong export growth.

The British currency edged 0.1 percent lower at $1.3915 , taking its losses so far this month to more than half a percent. While the magnitude of the losses are not big, sterling’s weakness in April is a concern because historically, the British currency has tended to gain in that month due to dividend-related inflows for the currency.

“After the hat-trick of disappointing numbers last week and a more dovish sounding Bank of England, a weaker than forecast Q1 GDP on Friday would put to bed any remaining optimism of a May rate hike,” said Fiona Cincotta, senior market analyst at City Index.

The release will be the last key data issued before the Bank of England’s Monetary Policy Committee meeting early next month.

Markets are split over whether the central bank will raise interest rates after Governor Mark Carney dampened expectations of a hike, saying last week that economic data was “mixed” and that there were several other MPC meetings later this year.

Market expectations for a rate hike have slipped back to 50 percent from an almost certain 80 percent a couple of weeks ago, according to swap markets.

Against the euro, which some analysts say is currently a better gauge of demand for pounds given there has been considerable dollar-specific news this week, sterling weakened 0.2 percent to 87.45 pence per euro. (Reporting by Saikat Chatterjee; Editing by Catherine Evans)

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