Sterling has fallen below $1.30 for the first time in 2020 as signs grow that the Bank of England could cut interest rates as soon as this month.
The pound fell 0.5 per cent to $1.2996 in morning trading on Monday, leaving it nearly 2 per cent lower since the start of the year.
The shape of monetary policy has overtaken political risk as a key driver for the currency since the beginning of 2020.
Over the weekend, Gertjan Vlieghe, an external monetary policy committee member, told the Financial Times he would vote for a cut in interest rates later this month if data do not show the UK economy is picking up. He said he would need to see “an imminent and significant improvement” in UK data to justify waiting to vote to lower interest rates from 0.75 per cent to 0.5 per cent.
On Friday, Silvana Tenreyro, another external MPC member, told a conference she could also vote for a rate cut “in the coming months” if there was no sign of a pick-up in the economy.
At the MPC meeting in December, the nine-member committee voted 7-2 against cutting rates, and there is just a 21 per cent chance of a rate cut priced in derivative contracts, CME Group data show.
Lee Hardman, a currency analyst at MUFG, said: “The UK rate market has been underpricing the risk of a BoE rate cut and will need to continue to adjust to price in a higher risk as soon as at the end of this month.”
The pound’s weak start to the year has come even as investors begin to move back into unloved UK assets.
Investors have poured more than $10bn into sterling assets over the past three months as the threat of a no-deal Brexit has evaporated and a measure of political stability has returned.
A total of $9.1bn has returned to UK equities since the week ending October 9, while bonds have seen a more modest $1.7bn of inflows, according to data compiled by Goldman Sachs.
Most of those inflows have come from funds domiciled in the euro area, while flows from other regions have not shown the same persistence.
The fresh investor interest has come after Boris Johnson’s government struck a surprise exit deal with the EU in early October, and then won the ability to implement it in the subsequent general election.
The pound rose more than 10 per cent between early October and the Conservatives’ election victory in mid-December, but has since given up some of those gains as the prime minister has indicated he will seek to wrap-up talks on the UK’s future relationship with the EU within the next year and questions over monetary policy have emerged.
The Goldman data also showed that investors are still underweight the UK, despite the fresh surge of interest.
“We have a cautious tactical view on the pound due to the risk that disappointing data in the coming weeks could raise the odds of easing by the Bank of England,” the US bank’s currency strategists said.
“But if the domestic activity data hold up reasonably well, further inflows into the UK should support the pound deep into 2020.”