LONDON: Worries and uncertainty over the impact of Britain’s looming exit from the European Union drove sterling to another five-week trough below $1.30 on Wednesday as investors awaited the outcome of September’s meeting of the US Federal Reserve.
Since plumbing a three-decade low of $1.2798 in early July, shortly after Britain’s referendum on EU membership, the pound had rallied more than 5 percent up against the dollar, as economic data showed the immediate effects of the Brexit vote were not as dire as had been feared.
But with parliament back after its summer recess, and Brexit headlines firmly back on newspapers’ front pages, concern that Britain will take a significant economic hit when it formally leaves the Union have started to weigh.
The Sunday Telegraph reported over the weekend that senior members of the ruling Conservative Party are supporting a new group to lobby for a so-called ‘hard Brexit’ and persuade Prime Minister Theresa May to leave the EU’s lucrative single market.
“People are slowly getting used to the idea that’s thrown at us in every newspaper you can find: that a hard Brexit is likely,” said Societe Generale macro strategist Kit Juckes, adding that sentiment was helping drive sterling lower this week, rather than new developments.
“I’m bearish - I think we’ve probably got about 5 percent more to go, but it’s going to be a slow and uneven move lower,” he added. “All we’re doing now is facing the long-term debilitating impact on the economy and a long-term period of uncertainty.”
Sterling slipped to $1.2946 in early deals in London, its weakest since Aug. 16. By 1530 GMT it was trading at $1.2970, 0.1 percent lower on the day and over 3 percent off its high from just over two weeks ago.
Michael Metcalfe, global head of macro strategy with State Street, said many major asset managers were probably still sitting on “short” positions in sterling - bets that it will fall - left over from trading around the Brexit vote.
“Investors (at the time) bought gilts, bought UK stocks and hedged the currency,” he said.
“The question is how long they hold onto that position: it would benefit sterling if they decided to cash in, but there does seem to be the view that it will fall further.”
The pound could move later in the day when the US Federal Reserve announces its latest policy decision - though an interest rate hike this month has been virtually priced out by markets, some investors are expecting the Fed to flag a rise by the end of the year.
Against the euro, sterling was also 0.1 percent weaker at 85.860 pence, close to the four-week low of 86.31 pence it hit the previous day.
“We remain broadly bearish on sterling,” wrote BNP Paribas analysts.
“Short sterling positioning was squeezed considerably over the past month...as UK data surprised to the upside. Our short-term fair value model...signalled that this positioning squeeze had pushed sterling beyond its short-term fair value.”—Reuters
