Sterling extends fall below $1.24 on Brexit and economic growth fears


© Reuters. File photograph shows an employee walking over a mosaic depicting pound sterling symbols on the floor of the front hall of the Bank of England in London

By Saikat Chatterjee

LONDON (Reuters) – Sterling fell below $1.24 to a more than two-year low on Wednesday as markets continued to price in the growing risk of Britain crashing out of the European Union without a transition arrangement in place.

With economic data also showing the UK economy struggling to gain traction, heaping more pressure on the Bank of England to ease monetary policy, investors took to the currency derivatives and futures markets to bet on more weakness.

“Clearly the issues facing the UK currently have not been faced in the last decade or so, even during the global financial crisis and the potential for the pound to hit the 2016 lows is there,” said Neil Mellor, a senior currency strategist at BNY Mellon in London.

In October 2016 the British currency plumbed very briefly to more than three-decade lows below $1.15 during a flash crash in the currency markets in early Asian trading hours.

While the currency has recovered since then, and strengthened to nearly $1.34 earlier this year, fears that the new British Prime Minister will drag Britain out of the EU without a deal in place has prompted traders to dump the pound in recent days.

On Wednesday, the pound weakened for a third consecutive day against the dollar to $1.2391, its lowest level since April 2017 and on track for its biggest monthly drop since June 2018.

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The currency has lost 1% against the euro so far this month while against the greenback it has fallen around 2.3%. It was already the worst-performing G10 currency in the second quarter.

Arch-Brexiteer Boris Johnson is seen as a shoo-in to be voted Conservative Party leader next week and hence become the next prime minister. Johnson and his leadership rival Jeremy Hunt have vied with each other to show party members their willingness for a “hard” Brexit.

HSBC strategists say the prospects of a “no-deal” outcome would see the pound fall to $1.10.

Those fears got a further boost when both Johnson and Hunt said late on Monday they would not accept the so-called Northern Irish backstop element of Theresa May’s Brexit deal.

The backstop, one of Brussels’ principal demands in Brexit negotiations, is designed to prevent the return of a hard border between EU member Ireland and British province Northern Ireland. If implemented, the UK would follow many EU rules until arrangements are made to avert a hard border.

The possibility of a “no-deal” Brexit has sent investors scurrying to brace for greater volatility in the pound, with three and six-month implied volatility gauges jumping in recent days while traders ramped up short futures positions in the pound.

According to data from the Commodity Futures Trading Commission, the week to July 9 saw speculators increasing net short sterling positions to $5.69 billion – the fourth consecutive week of increase.

(For a graphic on ‘GBP volatility curve’, click https://tmsnrt.rs/32sNMW4)

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