Sterling fell on Friday, dragged down by expectations that the Bank of England is likely to ease monetary policy in coming months to cushion the economy from the impact of Britain’s shock vote to leave the EU.
British government bond yields tumbled to record lows, as investors priced in rate cut chances and perhaps more quantitative easing in the summer months. On Thursday, Governor Mark Carney, who had previously warned of a possible recession in Britain if it chose to leave the EU, hinted at more stimulus.
The BOE's Monetary Policy Committee would announce an initial assessment of the situation on July 14th, after its next scheduled meeting, Mr Carney added. Money markets, based on sterling overnight indexed swaps, were pricing in a rate cut in August or September.
Sterling slipped to $1.3290, not far from a 31-year low of $1.3122 struck on Monday. It was also weaker against the euro, with the single currency trading at 83.60 pence, having hit 83.845 pence on Thursday, its strongest since March 2014.
“Governor Carney standing ready to cut interest rates in the summer as the British economy undergoes post-traumatic stress has pushed front-end gilts into negative-yielding territory,” said Hans Redeker, head of currency strategist at Morgan Stanley. He added this suggested a weaker currency and lower real rates of interest. The pound had slid almost 8 per cent last Friday, the steepest daily decline in the post-1973 floating-exchange-rate era, after the result of Britain’s EU referendum stunned markets.
Those losses continued into Monday, with sterling shedding another 3 percent and markets firmly in risk-off mode. As risk appetite and stock markets recovered this week, so did sterling, gaining more than 1.5 percent on Tuesday and Wednesday against the dollar.
But most of those gains were wiped away on Thursday as investors bet that interest rates would be cut further from their current record lows in the months to come. Most of the world’s biggest banks are forecasting a fall in sterling to $1.20. Forecasts for sterling by the end of the year have been cut by up to 30 cents since Friday.
Reuters
