Markets

Sterling sinks to levels last regularly traded in mid-2017

Pound also fell against euro, leaving it at €1.1123

Photograph: iStock

Tue Jul 9 2019 - 11:43

Britain’s currency fell on Tuesday to levels last regularly traded more than two years ago amid persistent uncertainty over Brexit and deepening economic concerns.

Sterling fell as much as 0.4 per cent to $1.246 on Tuesday. It marked the lowest point for the currency since April 2017, excluding a ‘flash fall’ that took place this January. The pound also fell on Tuesday against the euro, leaving it at €1.1123.

Boris Johnson, the frontrunner in the battle to replace Theresa May as Conservative leader and prime minister, has said Britain should part with the EU on October 31st "come what may". His hard-nosed approach has heightened concerns over the prospect of a potentially damaging no-deal Brexit. Jeremy Hunt, the other contender in the leadership fight, has also been forced to take a similar tack.

Vasileios Gkionakis, head of FX strategy at Banque Lombard Odier, said the competition between Mr Hunt and Mr Johnson has been about "who can be the biggest Brexiter of them all," which hasn't helped sentiment about sterling.

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Moody’s, the rating agency, warned last week that a no-deal divorce would “likely” spark a UK recession. A run of weak data has prompted concerns that the UK economy could have contracted in the second quarter, with a first estimate of GDP due to be published on Wednesday.

"Barring a significant positive surprise, tomorrow's data are likely to confirm that the economy is on course to register a contraction for the second quarter," said Dean Turner, UK economist at UBS Global Wealth Management.

Crunch period

Lee Hardman, currency analyst at MUFG, said the fall below $1.25 may “open the door to a potential retest of the lows from late 2016 and early 2017 at closer to the $1.20-level as we head into the crunch autumn period.”

“At the current juncture, it is difficult to see a potential trigger that could result in a sustained reversal of the current bearish trend of the pound,” he said. Mr Gkionakis agreed that sterling could head towards $1.20, with “political rhetoric around a no deal Brexit [expected]to intensify in the summer.”

Mr Hardman added that “UK economic fundamentals have weakened sharply in recent months” and that the Bank of England has signalled it may “adopt a more dovish tone at their upcoming policy meeting in August.”

Markets are now pricing-in a probability of roughly 40 per cent that the Bank of England will reduce its main lending rate by the end of this year, according to Bloomberg data on overnight index swaps. While other major central banks are also expected to loosen monetary policy, growing expectations for a BoE reduction have removed another potential support for the currency, analysts have said.

"The odds are that rising slack in the economy will lead the BoE into a cycle of easing. BoE governor Mark Carney already stated that the economy was slowing down and that the Bank would have to cut in a no-deal Brexit," added Sebastien Galy, senior macro strategist at Nordea Asset Management.

Angst

In a sign of the angst in some corners of the market, hedge funds last week increased their bets that sterling will fall by $1.2 billion to $2 billion, according to Goldman Sachs calculations based on US Commodity Futures Trading Commission data. The report covers the futures market, which provides a useful proxy for activity in the sprawling global exchange market.

Sterling’s fall on Tuesday helped Britain’s FTSE 100 outperform its continental European peers, posting a narrower decline of 0.2 per cent against a fall of 0.7 per cent for the international Stoxx 600. London’s main equities index is home to range of multinationals which benefit from a weaker pound when earnings made in foreign currency are repatriated into sterling.

– Copyright The Financial Times Limited 2019

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