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Sterling steadies after recent gains

• Posted by Shyam Gokani in Bank of England, Brexit, Currency, Dollar, Economy, EUR, GBP, Mark Carney, Sterling, UK
• May 23, 2016
• No Comments

Sterling steadied around $1.45 on Monday after gaining more than 1 percent against the dollar last week, with investors still worried that a referendum in exactly one month could see Britons vote to leave the European Union.

Several polls last week put the “In” camp well ahead in the run up to the June 23 vote, easing some fears and driving bookmarkers to widen their odds on a Brexit to about 7/2, indicating a 22 percent chance.

That, along with a robust UK retail sales report for April, boosted the currency, driving it to a 3-1/2-month high against a trade-weighted basket of currencies.

But strategists said sterling would be vulnerable over the coming weeks.

After last week’s surprise sterling outperformance, we think that it is only a matter of time before the buzz wears off and reality kicks-in.

While a flurry of polls last week placed the ‘Remain’ campaign comfortably in the lead, clear evidence of a divide in sentiment among various demographic groups is concerning as it makes the outcome particularly vulnerable to voter turnout.

Sterling was flat on Monday at $1.4500, and at 77.415 pence per euro, well clear of last week’s 3-1/2-month high of 76.465 pence per euro.

Worries about a possible Brexit have weighed on the pound since late last year. Trade-weighted sterling shed 11 percent between mid-November and early April, when it hit a 2 1/2-year low, but it has since then recovered almost 5 percent.

Investors worry that leaving the EU would damage a country with a trade deficit of 12 billion pounds, its widest in eight years, and a current account deficit that soared to 7 percent of GDP in the final quarter of 2015.

The probability of exit implied by the UK bookmakers’ quotes is close to its lowest level since the UK general election last May.

This may leave sterling open to a correction lower if online polls continue to suggest little change in sentiment.

 

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