February 5, 2018 / 3:01 PM / 3 months ago

UPDATE 1-Sterling falls 0.7 pct on Brexit and economy fears

(Updates prices)

* Biggest 2-day drop in more than six months

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

By Saikat Chatterjee

LONDON, Feb 5 (Reuters) - Sterling fell 0.7 percent on Monday as surveys showing a slowing British economy and negative news around Brexit negotiations sapped investor confidence in a busy week for the central bank.

Financial data firm IHS Markit said on Monday growth in the world’s sixth-biggest economy looked set to slow to 0.3 percent in the first quarter, down from 0.5 percent in the last three months of 2017.

Sterling’s losses were also exacerbated by the general undertone of risk aversion in the markets with most European stocks down by more than a percent as investors unwound risky bets.

“We are starting to see some pressure on carry trades: U.S. high yield bonds, interest rates flattener strategies, long emerging market trades and generally leveraged long carry bets,” said Alberto Gallo, head of macro strategies at London-based fund Algebris.

Sterling traded as low as $1.3987, the lowest since Jan. 30. On a two-day rolling basis, it has fallen 1.7 percent, its biggest drop since early June 2017.

Britain has ruled out staying in any customs union with the EU after Brexit, but the nature of its trading relationship with the world’s biggest trading bloc has split Theresa May’s government and Conservative Party.

With those brewing tensions in the background, British and European Union negotiators this week hold their first formal Brexit talks since the interim deal in December unlocked discussions on their future relationship.

Ratings agency S&P Global said that disorderly Brexit would bring renewed downward pressure to the country’s sovereign rating.

Still, investors were wary of chasing the currency lower before a policy decision later this week where a repricing of Bank of England interest rate hike expectations - several banks are now calling for a rise to come in May, and for another to come later in the year - may be on the cards.

BoE Governor Mark Carney sounded a more upbeat tone than previously at a testimony last week, saying wage growth was finally picking up and that the focus of the BoE is shifting back to tackling above-target inflation.

The central bank releases its inflation report on Thursday and announces a decision by its monetary policy meeting where it is expected to keep interest rates on hold.

Though oil prices, a key component of the import basket and a big driver for inflation, have rallied by more than 10 percent since the Bank of England raised interest rates in November, the impact has been mitigated by sterling’s 6 percent rise in that period.

Latest positioning data showed net long sterling positions remained at their highest levels since July 2014.

Reporting by Saikat Chatterjee, Editing by Alison Williams

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