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Sterling steadies but more weakness on the cards

• Posted by Shyam Gokani in Bank of England, Bremain, Currency, David Cameron, Dollar, Economy, EUR, GBP, Mark Carney, Referendum, Sterling, UK
• July 8, 2016
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Sterling steadied this morning less than two U.S. cents away from a 31-year low, having put in its worst three-weekly performance since the currency’s 1992 crisis, following Britain’s shock vote to leave the European Union.

Most currency pairs were trading in tight ranges ahead of a U.S. non-farm payrolls report due at 1330 – one of the most closely watched sets of monthly data – which could provide clues on the direction of U.S. interest rates.

Sterling slipped under $1.30 (£1.01) 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 after a number of UK property funds suspended trading, in one of the first major signs of financial stress since the EU referendum.

Traders are now focusing on the Bank of England, which meets next week and will decide whether to leave its benchmark interest rate at its historic low of 0.5 percent, or to cut rates in an effort to shore up the economy.

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.

Despite the scale of sterling’s falls already, most analysts and traders reckon further weakness is on the cards. Britain’s hefty current account deficit — one of the highest in the developed world — leaves the country, and currency, vulnerable to any pull-back in investment flows, which many think is on the cards following the vote for Brexit.

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

News yesterday 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.

Areas 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 — would continue to be risk factors. We could see the pound hitting $1.20 during by October.