Markets

Sterling falls to one-month low against euro

Lack of coherent UK strategy on Border puts UK currency under pressure

Sterling suffered on news that the UK cabinet could not reach an agreed position on the Border. Photograph: EPA

Thu Jun 7 2018 - 17:12

Sterling fell to a one-month low against the euro on Thursday as concerns about Brexit negotiations prompted investors to lock in gains after a recent rebound. The UK currency also reversed earlier gains against the dollar, falling by 0.3 per cent.

Sterling had hit a two-week high against the dollar in early trading, helped by general weakness in the US currency on the back of a broadening rally in the euro.

But headlines about UK prime minister Theresa May’s struggles to get her own cabinet to agree on a plan to prevent a hard Border in Ireland if Brexit talks fail, pushed sterling lower.

"It is become clear that there is no coherent answer to the Irish question at the moment," said Jonathan Davies, head of currency strategy at UBS Asset Management.

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“Most investors, I think, are moving in the direction of thinking this will get resolved and we will get a nice orderly Brexit but clearly not everything has been resolved and it is not clear how it is going to be resolved,” he added.

Sterling rose to $1.3472 per dollar in early London trading , its highest levels since May 22nd as the dollar’s run higher in recent weeks peaked.

But it gave up those gains and fell as much as 0.3 per cent on the day to $1.3371.

Against the euro, sterling weakened to a one-month low at 87.77 pence.

Despite sterling’s weakness, markets were broadly neutral on sterling’s outlook with positions broadly light.

The dollar’s rally in recent weeks has squeezed out long sterling positions with net long bets on sterling falling to a quarter from a four-year high in April.

But after falling to around $1.32 at end-May, sterling has rebounded somewhat thanks to a pick-up in data.

Weaker momentum

Data this week, including a widely watched survey of the dominant services sector on Tuesday, suggest weaker economic momentum in the first quarter was temporary and the economy was recovering.

Investors said they would need to see more than one month of solid economic data before expecting the Bank of England to raise rates. Money markets are now pricing in a 60 per cent chance of a 25 basis point rate rise in September.

A trade-weighted index for the British currency has tiptoed higher to 78.69 after hitting a near-three month low in end May.

"I don't think the market is focused on the underlying Brexit issues at the moment but going along with the general dollar trend," said Neil Mellor, a senior currency strategist at BNY Mellon in London. – Reuters

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