May 14, 2020 / 3:30 PM / 12 days ago

UPDATE 3-Sterling hits low of $1.2166 as UK's Brexit stance deters investors

(Updates throughout, adds news chart)

By Elizabeth Howcroft

LONDON, May 14 (Reuters) - Sterling touched a low of $1.2166 on Thursday, extending its losses after it slipped below the key $1.22 level for the first time in more than five weeks, held down by a combination of coronavirus-induced economic woes and Brexit risks.

Sterling fell after the government reiterated its refusal to extend the Brexit transition period deadline beyond December this year, signalled its unwillingness to compromise in trade negotiations with the EU and said that there would be border checks.

Cable was also held down by the fact that the dollar strengthened after Federal Reserve Chair Jerome Powell squashed growing speculation about negative interest rates in the United States on Wednesday and warned of an “extended period” of weak economic growth.

The pound is in its fourth consecutive day of losses and is the worst performing G10 currency so far this month, having fallen more than 3% against the dollar since the end of April.

“We’re getting a few clients asking about whether we’re going to return below $1.20 - that’s the kind of concern that some people are starting to have again,” said Kenneth Broux, FX strategist at Societe Generale.

“$1.2166 is really for me the line in the sand for cable - we have to try and close above that level this week and then we have a fighting chance of clawing our way out of trouble,” he added.

Versus the euro, the pound hit a six-week low on Wednesday and held near these levels on Thursday, last at 88.58 pence per euro.

Against the dollar, it hit a five-week low of $1.2182 just before 0700 GMT, recovered slightly, then fell to $1.2166 at 1246 GMT. It then edged up slightly and was last at $1.2204, down 0.3% since New York’s close.

Sterling has not been lower than $1.2166 since the end of March.

The UK’s death toll from COVID-19, the disease caused by the new coronavirus, has topped 40,000, by far the worst yet reported in Europe.

The government has been widely criticised for not providing enough COVID-19 testing, protective gear for health workers and medical equipment, and for the lack of clarity with which it set out plans to ease lockdown measures.

Britain’s economy shrank by a record 5.8% in March and an even bigger hit is expected in the coming months. The Bank of England said last week that the contraction of the economy in the April-June period could approach 25% and lead to the largest annual decline in more than three centuries.

More than three-quarters of Britons have applied for the government’s emergency - and hugely expensive - job retention scheme.

Britain’s government is on track to borrow a record 298 billion pounds ($364 billion) this year, equivalent to more than 15% of economic output.

The Bank of England’s Governor Andrew Bailey said on Wednesday evening that the bank can help spread the cost of coronavirus to society over time, adding that Britain had choices to make over whether more austerity would be needed.

On Thursday, Bailey said that the bank is not considering pushing interest rates below zero, although he declined to rule it out altogether.

More quantitative easing by the Bank of England in June is widely expected, which would hurt sterling.

Short bets have been building up over the past ten weeks, according to weekly futures data.

Georgette Beole, Senior FX Strategist at ABN Amro said the UK GDP contraction, the UK’s slow exit from lockdown, the likelihood more quantitative easing, uncertainty about Brexit and deteriorating investor sentiment will all weaken sterling further.

“We expect GBP/USD to weaken towards 1.18 in the coming months. We also expect sterling to weaken versus the euro,” Beole said.

Seasonal factors are also weighing on the pound - May is typically its weakest month.

Reporting by Elizabeth Howcroft; Editing by Toby Chopra

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