Sterling suffers volatility with brief drop of 0.5%

Sterling briefly fell more than half a per cent on Thursday before recovering its losses in volatile trade after the Bank of England said Britain in 2019 faced its weakest economic growth in a decade due to Brexit uncertainty.

The speed at which the British currency retraced its losses reflected how investors are focused more on ongoing Brexit talks than on the central bank’s economic outlook.

The pound, which was trading down 0.3 per cent before the rate decision dropped as low as 0.6 per cent on the day to $1.2854 (€1.13 ), a two-week trough. Against the euro, the pound weakened 0.2 per cent to 88.05 pence.

But it quickly recouped all those losses to trade flat on the day against the dollar at $1.2920. Against the euro, it strengthened to 87.67 pence.

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“Sterling markets are broadly pricing in the short-term Brexit uncertainty that Governor Carney alludes to,” said Viraj Patel, a currency strategist at Arkera, a financial technology firm. “All eyes are on Westminster and Brussels.”

While other central banks have said they will hold off from raising borrowing costs, the Bank of England restated that gradual and limited rate rises lie ahead for Britain, as along as a no-deal Brexit in just 50 days’ time is averted.

Money markets were pricing in about 41 percent probability of another quarter point rate hike before the end of the year compared to a fifty percent probability before the rate decision.

"Assuming an amicable outcome to the Brexit negotiations there are enough hawkish signals in the inflation Report to conclude that the BoE could hike rates later this year, which should support the currency," Dean Turner, UK economist at UBS Wealth Management said.

While the pound trimmed some of its losses as a press conference by Governor Carney got underway, broader derivative markets were still pointing to further losses.

The pound was especially volatile after the rate decision with the currency briefly falling below a 100-day moving average of $1.2896 before bouncing off an intraday low of $1.2854.

Two-week to one-month risk reversals on the pound, a ratio of calls to puts on sterling, showed an increased bias to sell the pound as Britain’s scheduled March 29 exit from the European Union nears.

Prime minister Theresa May will call on the European Union on Thursday to work with her to change the Brexit divorce deal and help her win the support of a divided parliament to smooth Britain's departure from the bloc.

On Wednesday, European Council president Donald Tusk had said the EU would make no new offer on Brexit and those who promoted Britain's exit without any plan of how to deliver it deserve a "special place in hell". – Reuters