Sterling dropped below 1.23 against a strengthening dollar for the first time in nearly two years on Friday with analysts expecting the Bank of England (BoE) to slow down its hiking cycle after warning about recession risks.
The dollar was headed for a fifth winning week, ahead of a closely watched U.S. jobs report that is likely to back the case for aggressive Federal Reserve monetary policy tightening.
Most BoE policymakers believed "some degree of further tightening in monetary policy may still be appropriate in the coming months". A split emerged, with two members saying the guidance was too strong given the risks to growth.
"The shift in the wording of the guidance also suggests a committee that perhaps thinks it may not have much further to go," Citi analysts said in a note.
Sterling was down 0.4% at $1.23, after hitting its lowest level since June 2020 of 1.2276.
"The key for us is how close the forecasted inflation rate (2.16%) is to the 2.0% target with Bank rate remaining at 1.00%," said Derek Halpenny, head of research global markets EMEA and international securities at MUFG Bank.
"That, in addition to the sheer scale of deceleration in GDP growth, are compelling reason to believe a long pause is coming after a June hike," he added.
Money markets are currently pricing 120 bps of BoE rate hikes by year-end, including 50 bps by August 2022.
"Signs that the BoE may be close to the top of its tightening cycle suggest sterling may be vulnerable as trading partners including the US and the eurozone push ahead with tightening cycles," ING analysts said in a note.
"The 200-day moving average near the 0.8450 area may now prove good EUR/GBP support, with a bias towards 0.86 now."
The pound was flat at 85.30 against the euro after falling to its lowest since December 2021 on Thursday at 85.45 pence.
Meanwhile, British Prime Minister Boris Johnson's Conservative Party lost control of traditional strongholds in London and suffered losses elsewhere in local elections, early results on Friday showed, as voters punished his government over a raft of scandals.
(Reporting by Stefano Rebaudo, editing by Saikat Chatterjee and Emelia Sithole-Matarise) ;))