By Sujata Rao and Saikat Chatterjee
LONDON (Reuters) - Sterling held near its lowest level for more than two years on Wednesday as better-than-expected growth data failed to dispel gloom caused by the state of the economy, the rising risks of a no-deal Brexit and a diplomatic spat with the United States.
Until recently sterling was supported by the Bank of England's relatively confident outlook on the British economy and its hawkish policy stance, but it has been undermined by governor Mark Carney's comments last week, which suggested the bank is ready to join other central banks in cutting interest rates.
Wednesday's data showed Britain's economy grew more than expected in May, expanding 0.3% after contracting by 0.4% in April.
But other recent data including retail sales and purchasing managers' surveys, have suggested the British economy may have contracted in the second quarter, underlining the fallout from uncertainty about how and when Britain will leave the European Union.
The composite PMI last week slipped into contraction for the first time since mid-2016, amid signs that the hitherto buoyant services sector is now succumbing to the malaise.
Against the dollar , the pound edged 0.1% higher to $1.2478, still close to Tuesday's low of $1.2439, its lowest in more than two years, barring a flash crash earlier this year.
Against the euro (EURGBP=D3), the pound was on track for a 10th consecutive week of losses, dropping 0.1% to 89.95 pence.
(For a graphic on 'Pound set for record losing streak vs euro', click here https://tmsnrt.rs/2YU4Xxq)
"Yesterday we saw tremendous concerns and honestly the trigger was a minor retail sales publication. If such a minor thing can trigger such a sharp depreciation it shows that there are several reasons for pound sterling weakness," said Esther Reichelt, FX Strategist at Commerzbank in Frankfurt.
"Overall concerns – a new prime minister coming up, no solution available or apparent for Brexit, and additionally growth concerns and the market increasingly only pricing in Bank of England rate cuts – of course these are all factors weighing on pound sterling."
The recent data run, followed by an apparent change in the BOE stance signalled by Carney, has seen markets lean towards pricing in rate cuts, aligning the BOE with other central banks around the world.
POLITICS
Nor is there any sign of respite on the political front.
Arch-Brexiteer Boris Johnson, who is the overwhelming favourite to become the next prime minister on July 23, has vowed to take Britain out of the EU by an Oct. 31 deadline with or without a transition deal in place.
Johnson has not ruled out suspending, or "proroguing", parliament to prevent it blocking a disorderly Brexit.
And just as Britain prepares to leave the EU, its closest trading partner, it has also become embroiled in a diplomatic row with the United States following the leak of memos about the U.S. administration from the British ambassador
The global backdrop is also continuing to worsen, with trade tensions rattling growth prospects for all major regions. The European Commission on Wednesday cut 2019 growth forecasts for the bloc to just 1.2%.
Kamal Sharma, director G10 FX at Bank of America Merrill Lynch, said the pound has always been closely correlated with the outlook for global and euro zone growth.
"Both of them have struggled and that is weighing on the pound," he said, adding: "The swings we are seeing around inventory and other data is hardly supportive of the sterling outlook."
Fears appear finally to be creeping into hitherto-calm options markets, with three-month implied volatility rising to two-week highs .