By Joice Alves
LONDON -Sterling fell on Wednesday as Britain and the European Union looked far from finding a post-Brexit agreement over Northern Ireland, while a surge in inflation sparked U.S. rate-tightening bets, strengthening the dollar.
Britain left the EU last year but has since put off implementing some of the border checks between its province of Northern Ireland and EU member Ireland that the bloc says London is obliged to under their divorce deal.
Sterling was under renewed pressure after EU governments agreed on the need for “robust” action against Britain if London follows through on its threat to invoke emergency unilateral provisions.
“Downside risk may emerge for the pound in the coming days as it looks increasingly likely that the UK will unilaterally suspend parts of the Northern Ireland Protocol,” analysts at ING said.
Irish government ministers have met to dust off contingency plans in case disagreements between Britain and the EU trigger major trade disruption.
In the meantime, British Brexit minister David Frost told parliament’s upper chamber that he was not ready to give up yet on negotiations with the EU.
Sterling fell 0.6% versus the dollar to $1.3484 by 1635 GMT, and it was not far from a five-week low touched after BoE surprised investors last week by leaving its main interest rate unchanged at 0.1%.
The dollar rose against a basket of currencies after U.S. consumer prices surged at their highest rate since 1990, boosting speculation the Federal Reserve could change its view that inflation is transitory and raise interest rates.
Versus the euro, the pound edged 0.1% higher at 85.44 pence, after falling on Friday to its lowest level since Oct. 1.
Markets are now pricing in a December interest rate hike by the BoE but uncertainty remains high..
“Despite the prospect that the Bank may still choose to raise rates next month, its recent downward revision to the UK growth outlook and its expectation that unemployment will be trending higher by 2024 is suggestive of a cautious policy outlook,” said Jane Foley, head of FX Strategy at Rabobank.