The pound slipped against the dollar and euro on Friday after the UK Purchasing Managers’ Index (PMI) fell to a four-month low, but was still set to end the week up more than 1% after a new phase of intense Brexit talks restarted.
The pound gave up some recent gains after an early flash PMI reading – a gauge of private sector growth – fell to a four month low of 52.9 in October from 56.5 in September.
Britain’s economic recovery from the COVID-19 shock was already beginning to falter in August.
Since then, new cases have risen rapidly, raising concerns that a second wave, combined with a possibile no-deal Brexit, pose a double-whammy of downside risks.
The pound took a hit from the PMI data, as well as overnight news that consumer confidence had fallen to the lowest since May, said Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets.
“I think it does play into that narrative that the macro support for sterling in Q4 is going to look increasingly challenging,” he said.
At 1123 GMT, the pound was at $1.3067, down 0.1% on the day but up 1.2% on a weekly basis.
It hit a six-week high of $1.3177 on Wednesday, and since then has not fallen below $1.3050.
The pound was at 90.645 pence per euro, having slipped around 0.3% on the day by 1126 GMT.
Analysts say trade talks between Britain and the European Union are the primary driver of the pound. Britain left the EU in January and is in a status quo transition period, which ends on Dec. 31.
Sterling had its best day in seven months on Wednesday, surging 1.7% against the dollar, when Britain and the EU said they would start a new phase of negotiations.
Prime Minister Boris Johnson’s spokesman had said a week earlier that talks were over – a move markets saw as brinkmanship.
“Anything that brings a deal – any deal – closer to the table is going to see sterling strengthen. Anything that highlights the risk of no deal is going to see sterling weaken,” said John Goldie, an FX dealer at Argentex.
He added that this week’s moves suggest the dynamic is skewed, as sterling rallied more on positive news.
Deutsche Bank analysts wrote in a note that a free trade agreement would cause a 0.6% hit to UK GDP in 2021, versus a 1.1% loss in the case of a no-deal Brexit.