Sterling yesterday plunged to its lowest level in almost 13 years, hammered by expectations that the Bank of England will opt for another large interest rate cut this week in a move to avoid a recession turning into a protracted slump in the wake of a new salvo of grim economic data.
The latest Purchasing Managers Index for the all-important UK service sector fell to a new record low of 40.1 in November, well below expectations and marking a further contraction from the previous month's level of 42.4.
Rob Minikin, a currency strategist at Standard Chartered, said: "The pound has been performing relatively poorly, and the key to that is the Bank of England policy outlook."
In mid-morning trading yesterday, one pound bought $1.4664, but it later climbed to $1.4769.
The falling pound also pushed the euro up 0.5% to 85.85p, its strongest since mid-November.
However, on a trade weighted basis, the floundering pound fell to 80.4, its weakest point since January 1996.
The trade weighted index is a multilateral exchange rate which is a weighted average of exchange rates of home and foreign currencies, with the weight for each country equal to its share in trade.
Sterling has now fallen almost 18% on the trade-weighted index since the start of the year.
Market expectations are growing that the central bank will today slash borrowing costs by a full percentage point as it tries to shore up growth and fend off the risk of deflation.
Tom Levinson, a currency strategist at ING, yesterday said: "It's just another piece of terrible data out the UK, and it backs up the idea that we'll get a big cut from the Bank."
AIB Group economist Geraldine Concagh added: "Sterling has gone on the defensive in the build-up to the Bank of England meeting."
Central banks in the euro zone and New Zealand as well as Sweden are also expected to cut rates substantially this week.
