British prime minister Theresa May, who is in Brussels to attend her first EU summit since Britain’s vote to leave the bloc in June, tried to reassure EU leaders over Brexit but was told by French president François Hollande to prepare for tough talks.
Sterling had been trading just above $1.22 for most of the European trading session, but fell to as low as $1.2171 after US traders arrived at their desks. By mid-afternoon it was trading at $1.2198, down half a percent on the day.
“Obviously the dollar’s been on the front foot today and sterling has taken another dip since the US came in,” said a trader with one large international bank in London, yesterday.
“Looking at the price action, there may have been some orders go through on sterling yen.
"$1.22 was a level on the day after the flash crash, so there is the feeling that somewhere in the mid $1.22s was a pivot level for the pound and we have broken that. I would stress today this is happening in pretty thin volumes.”
The pound has fallen nearly 18% since the June vote with losses accelerating in October after Ms May raised the spectre of a “hard” Brexit, where the government will negotiate for an exit that favours tighter immigration controls over free trade, likely curbing foreign investment needed to fund Britain’s huge current account deficit.
“Investors have started to price in the impact of a hard Brexit on the economy and the current account driven by the political stalemate between the UK and the rest of Europe,” said Nick Kounis, head of macro research at ABN-Amro.
Sterling’s slide has sent inflation expectations soaring, driving investors to reassess chances of further easing by the Bank of England this year.
It also led some analysts to say that foreign investors were demanding an extra premium before buying gilts.
Britain’s 10-year gilt yield was little changed in early trading at around 1.09%, holding below roughly the four-month highs it hit on Monday at 1.22%.
Against the euro, the pound was flat at 89.185p. The single currency had been hurt on Thursday by European Central Bank chief Mario Draghi’s comments, as he quashed speculation that the ECB was considering how to wind down bond purchases.
Britain’s public finances showed a much bigger than expected deficit in September, a setback for chancellor Philip Hammond as he prepares to deliver the country’s first budget plans since the Brexit vote.
Yesterday’s figures may limit Mr Hammond’s ability to cushion the blow of the referendum result via higher spending or tax cuts.
Britain ran a budget shortfall of £10.6bn last month, 14.5% higher than the deficit in the same month last year, the country’s office for national statistics said.
The deficit, excluding state-owned banks, was above all forecasts in a Reuters poll of economists, which had produced a median projection of an £8.5bn shortfall.
Despite falling from more than 10% of economic output in 2010 to 4% in the last financial year, Britain’s deficit remains among the highest for any developed nation. The UK saw its first fall in corporation tax receipts in seven years last month.