Sterling hovers near lows against euro and dollar

Sterling hovered near seven-year lows against the dollar and 14-month lows against the euro on Thursday and was on course for its worst weekly performance since 2009 as investors fret about a possible British exit from the European Union.

Uncertainty created by the June 23rd Brexit referendum on whether to stay in the EU meant data confirming the UK economy grew at 0.5 per cent in the fourth quarter was largely ignored. The figure was unchanged from an initial estimate.

Business investment fell at the sharpest pace in nearly two years, however, hit by disposals in the transport equipment sector, adding to the gloomy sentiment that has dragged on the pound in recent days.

Sterling was 0.1 pe rcent lower at $1.3910, not far from a seven-year low of $1.3878 struck on Wednesday, when selling accelerated as companies and investors rushed to protect themselves against the chances of a British exit. Some sellers are targeting $1.35 and below, levels last seen when the pound sank towards parity with the dollar in the mid-1980s.

The euro was slightly higher at 79.18 pence, not far from a 14-month high of 79.28 pence.

Political uncertainty

“Current political uncertainty is driving sentiment for sterling as the UK is struggling to come to terms with the battle over a potential Brexit,” said Alex Lydall, senior sales trader at Foenix Partners, a company which offers hedging solutions to small and medium sized companies in Britain.

Analysts say uncertainty stemming from Brexit is likely to hit investment flows and could lead to a bigger current account gap, already among the biggest in the developed world at 5 percent of gross domestic product.

A larger current account gap usually leads to a weaker currency as outflows outpace investment flows.

An exit from the EU, Britain’s largest trading partner, would also be likely to impact business and consumer confidence, hit growth and lead to more unemployment.

HSBC, Britain's biggest bank, said the currency could lose up to 20 per cent of its value and economic growth could be up to 1.5 percentage points lower next year if Britain votes to leave.

Reuters