You are here

Sterling dives to 10-month low below $1.30, more weakness seen

By Reuters - Jul 19,2018 - Last updated at Jul 19,2018

British Pound Sterling banknotes are seen at the Money Service Austria company’s headquarters in Vienna, Austria, November 16, 2017 (Reuters file photo)

LONDON — Sterling fell below $1.30 for the first time in 10 months on Thursday as the combination of weak economic data and a resurgent dollar sapped appetite for the British currency.

Weak retail sales data for June painted a picture of a struggling economy against the backdrop of stagnating wage growth, weak inflation figures and uncertainty over how Britain’s looming exit from the European Union will play out.

That is casting a shadow on well-set expectations of an interest rate rise by the Bank of England at its August 2 meeting.

The lacklustre data comes moreover at a time when the dollar has rallied more than 6 per cent against a basket of developed G-10 nations’ currencies in the last three months. Escalating trade tensions, robust US economic growth and a confident Federal Reserve have all boosted the greenback’s appeal. 

“With fundamentals weak and a big question mark on Brexit, we think sterling can fall into the low $1.20s,” said Neil Mellor, senior currency strategist at BNY Mellon in London.

Britain’s June retail sales declined 0.5 per cent, defying expectations of a 0.2 per cent increase on a monthly basis. That saw sterling extending recent falls, touching an early-September 2017 low of $1.2974 and down 0.7 per cent on the day. 

That is despite the fact that on a quarterly basis, retail sales rose the most in over a decade, up 2.1 per cent on the first three months of 2018.

Many reckon this should give the BOE some confidence about raising interest rates next month — bets on a hike remain fairly entrenched, with expectations for a 25 basis point rise now at around 70 per cent.

That’s down from nearly 80 per cent earlier this week.

“The data is not that great but we still expect the Bank of England to raise rates in August in the backdrop of a tight labour market and may signal an extended pause after that,” Credit Agricole strategist Manuel Oliveri said.

The weakening economy, messy politics and the ebbing of rate hike bets beyond August have already crushed bullish sterling bets, with short bets against the British currency the biggest since September 2017.

That marks a stunning reversal from April when long sterling bets peaked at more than three-year highs. Sterling was then around $1.43, dropping almost 10 per cent since then. 

Brexit and bears 

 

Most of sterling’s losses have come in recent weeks as Brexit uncertainty has grown.

After narrowly escaping defeat in parliament over her plans for leaving the EU this week, Prime Minister Theresa May has signalled she will not drop a proposal on Britain’s future relationship with the bloc.

Fears linger that the country may crash out of the EU without a trade deal in place.

“Around 1.30, sterling is nowhere near to being fully priced for a worst-case political scenario, but participation in the pound is unlikely to climb much until that worst-case scenario looks a lot more certain,” said Stephen Gallo, European head of FX strategy at BMO Financial Group.

However, the British currency’s performance looks better when measured against non-dollar currencies, suggesting much of its weakness is down to the broad-based dollar surge.

Against the euro for instance, sterling is only at a four-month low of 89.30 pence.

On a year-to-date basis, sterling is a middle-of-the-pack performer against the dollar with the Swedish crown and the Canadian dollar leading losers, according to Thomson Reuters data.

Against a trade-weighted basket of its peers , for example, sterling is at a late-November 2017 low. 

However, currency derivative markets are flashing warning lights. 

Three- and one-month risk reversals , a ratio of calls to put options, are trading at their lowest since June 2017, indicating traders are betting on more weakness. 

up
79 users have voted.


Newsletter

Get top stories and blog posts emailed to you each day.

PDF