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Politics, spending worries prod sterling below US$1.27

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Sterling fell half a per cent against a broadly stronger US dollar in morning trade in London on Thursday, with weak retail sales numbers and concerns about efforts to form a new minority government driving it back below US$1.27.

[LONDON] Sterling fell half a per cent against a broadly stronger US dollar in morning trade in London on Thursday, with weak retail sales numbers and concerns about efforts to form a new minority government driving it back below US$1.27.

The pound was also 0.1 per cent weaker against the euro and traders said the mood was edgy after a delay in sealing the support from Northern Ireland Unionists that Prime Minister Theresa May needs to continue in power.

Since Ms May lost her majority last Thursday, trade-weighted measures of sterling are down just under two per cent and a bleak economic landscape threatens to worsen that fall.

The Bank of England publishes its latest views on interest rates on Thursday, faced with further evidence of sharply rising prices, wage growth that is failing to keep pace and a weakening of demand from consumers.

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Market voices on:

"The overall trend is still not bad, the retail numbers are still holding up, but the likes of (business lobby) the CBI, the BRC (British Retail Consortium) are not optimistic," said Neil Mellor, a strategist with Bank of New York Mellon in London. "It is abundantly clear that the BoE will not be in a position to raise interest rates for a very long time."

By 0943 GMT, sterling fell 0.5 per cent to US$1.2692, and less 0.1 per cent against the euro to 87.95 pence. The move came as most major currencies suffered against the greenback after the US Federal Reserve stuck to its guns on forecasts of further rises in interest rates and gave its first hint of a trimming of its huge bond portfolio.

An evening speech by Chancellor Philip Hammond is expected to lay out his vision of a business-friendly "Brexit" from the European Union and will also be eyed for signs of a softening of budget cuts.

Senior Conservatives have been quoted as saying that budget austerity will need to end, particularly given the signs economic growth is slowing further. "Sterling is faltering into the BOE meeting," said Kathleen Brooks, head of research at City Index in London. "The squeeze on real wage growth suggests that the UK consumer is likely to be hobbled for some time, and this could weigh on sterling in the long term."

REUTERS

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