Sterling steadies after worst run since 1992

By: |
Published: July 8, 2016 9:43:47 PM

Sterling steadied on Friday less than two U.S. cents away from a 31-year low, having put in its worst three-weekly perfomance since the currency's 1992 crisis, following Britain's shock vote to leave the European Union.

Sterling steadied on Friday less than two U.S. cents away from a 31-year low, having put in its worst three-weekly perfomance since the currency’s 1992 crisis, following Britain’s shock vote to leave the European Union.

The pound was buffetted along with other major currencies by bumper U.S. jobs figures that still stopped short of convincing markets there was much chance of a rise in interest rates this year.

By late afternoon in London, it was up 0.2 percent at $1.2938 and almost half a percent at 85.32 pence per euro, still down respectively 13 and 10 percent since the Brexit vote on June 23.

“I would expect some pause right now,” said Tobias Davis, head of corporate treasury sales with Western Union in London.

“There are analysts calling for a cut in Bank of England rates next week but I disagree right now.”

Sterling slipped under $1.30 for the first time since 1985 earlier this week and has largely stayed below that level since then, dipping to as low as $1.2798 on Wednesday on signs of post-referendum stress in the property sector.

That has also left the pound on track for an almost 10 percent fall in the past three weeks – its steepest decline since September 1992, when Britain fell out of the pre-euro Exchange Rate Mechanism.

So far signals from the Bank of England are that it will seek to prop the economy up with more cuts in rates and potentially buying of government bonds, rather than erring on the side of caution to support the pound.

Money markets now price in a more than 70 percent chance of a reduction in the rate premium for holding the pound next Thursday.

“In terms of catalysts for another leg lower, we reckon the Bank of England next week is going to be key,” said BNP Paribas strategist Sam Lynton-Brown.

“We think they’re going to cut by 25 basis points, which is a view 70 percent priced into rates markets, so if that happens, sterling will come under some more pressure.”

VULNERABLE

Despite the scale of sterling’s falls already, most analysts and traders reckon further weakness is on the cards.

Britain’s current account deficit is one of the highest in the developed world and makes the country, and currency, vulnerable to any pull-back in investment flows due to the uncertainty generated by the referendum vote.

A number of banks are now forecasting a fall to the low $1.20s in the coming months and others predict eventual parity with the euro, compared with current levels of around 85 pence.

News on Thursday that Interior Minister Theresa May and eurosceptic rival Andrea Leadsom would battle it out to become Britain’s next prime minister had no noticeable impact on sterling, but analysts said that could change.

“Over the coming weeks, their stance on the UK’s future relationship with the EU will come into greater perspective and this could impact on the risk premium priced into sterling,” ING analysts wrote in a note to clients.

Analysts point to other risks highlighted by ratings agencies as potentially prompting another downgrade: the possibility of another referendum on Scottish independence, difficulties financing the current account deficit and sterling losing its reserve currency status. They see the pound hitting $1.20 by October.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.