Worsening global risk sentiment knocks sterling

By Joice Alves

LONDON, May 16 (Reuters) - Sterling fell on Monday as weak Chinese economic data added pressure on risky currencies, while investors scaled down their expectations for Bank of England interest rate rises this year.

Risk-sensitive sterling has fallen 10% against the dollar this year as the war in Ukraine, rising inflation, poor domestic economic growth and fears for a slowdown in the global economy have hit risk sentiment.

Lastly, poor Chinese economic data on Monday amid COVID-19 lockdowns, led to falls in assets considered riskier, including sterling and European stocks while helping the safe-haven U.S. dollar consolidate gains near a two-decade peak.

"Sterling's short-term outlook remains strictly tied to developments in global risk sentiment," said Francesco Pesole, FX strategist at ING.

"Unless we see a recovery in risk appetite this week, the risk of another drop in cable to the $1.2000 mark remains quite high," he added.

In a choppy start to the day, sterling GBP=D3 fell 0.2% against the dollar to trade at $1.2236 at 0900 GMT, and was not too far from a two-year low of $1.2156 touched on Friday.

It also fell versus the euro EURGBP=D3 , down 0.4% to 85.25 pence towards a seven-month low of 86.18 pence hit last week.

Money markets were pricing in around 133 basis points (bps) of Bank of England rate hikes by year-end, from 144 bps in April.

Expectations for rising interest rates tend to boost the value of a currency, but with markets turning their focus to recession risks in Britain, they are reassessing their view on how they expect the BoE to act in an effort to tame rising inflation.

"Previously a huge proportion of rate hikes had been priced into the market, (and) this outlook is now being re-assessed," said Jane Foley, head of FX at Rabobank London.

Graphic: World FX rates in 2022 Link
Graphic: Trade-weighted sterling since Brexit vote Link

Reporting by Joice Alves; Editing by Bradley Perrett

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