Markets

Sterling set for biggest weekly drop in 7 weeks after weak UK data

Derivative markets expect further currency volatility in coming days

Against the euro, the UK pound weakened 0.4 per cent to 87.62p. Photograph: iStock

Fri Feb 1 2019 - 19:36

Sterling slid on Friday, putting it on track for its biggest weekly loss in seven weeks, after survey data highlighted the degree of uncertainty sweeping British manufacturers as the country heads towards Brexit in less than two months.

While foreign exchange markets have broadly reduced the possibility of Britain crashing out of the European Union without a trade deal in place at the end of March, derivative markets are predicting more currency volatility in the coming days.

Investors have ramped up purchases of two-week options taking into account the dates when British lawmakers meet while one-month risk reversals, a ratio of puts to calls on a currency, have shown increasing signs of caution for the pound.

British prime minister Theresa May aims to get her parliament's approval for a revised deal on February 13th. If that fails, parliament will vote on next steps on February 14th.

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UK manufacturers scrambled to stockpile goods in January at the fastest rate since records began in the early 1990s, the IHS Markit/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) showed.

The survey also showed deepening pessimism, with British factory output growing by the smallest amount since July 2016.

Taking the shine off

“The PMI data has taken the shine off sterling after last month’s rally and there is a bit of profit taking at these levels,” said Lee Hardman, a currency strategist at MUFG in London.

Sterling fell more than half a percentage point against the dollar after the data, briefly piercing a 200-day moving average of $1.3045. It trimmed some losses to trade down 0.3 percent at $1.3074.

For the week, it is down nearly 1 per cent, breaking six weeks of consecutive gains.

Against the euro, the pound weakened 0.4 per cent to 87.62 pence.

The currency has strengthened 3 per cent against the dollar and 2.8 per cent versus the euro in January as currency traders slashed the odds on a no-deal Brexit. – Reuters

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