Sterling headed for its biggest weekly decline in more than a month against the dollar late yesterday as UK prime minister David Cameron stepped up efforts to reach a deal with fellow European leaders over the terms of UK membership of the bloc.
Expectations for price swings in the pound against the euro over the next six months climbed to the highest since 2011 as sterling whipsawed yesterday.
With traders already pushing back bets on the timing of a Bank of England interest-rate increase, the prospect of a vote on leaving the world’s largest trading bloc is causing further concern.
That helped push down the UK currency against all but one of its Group of 10 peers in 2016.
Mr Cameron had appeared late evening to be close to sealing a deal at the talks, setting him up to announce a referendum for as soon as June 23 on his country’s place in the EU.
With the possibility of negotiations dragging into the weekend, sterling held a three-week slide against the euro.
Mr Cameron cancelled a meeting of the UK cabinet to hold further meetings with his European counterparts as talks continued into yesterday evening.
“It’s likely we’ll still get something that gets us a referendum on this in June but that there will be enough questions within the agreement to encourage the ‘out’ camp,” said Kit Juckes, a global strategist at Societe Generale in London.
“I can’t imagine it becoming clear who will win, so I’ve got another four months of uncertainty on the currency. Is the market now bearish enough on sterling? My bias is still negative.”
Sterling dropped 1.2% this week to $1.4329 late yesterday in Europe. It was little changed at 77.62p per euro after reaching 78.98 just over a week ago, the weakest since December 2014.
Six-month implied volatility for the pound versus the euro, a measure of price swings based on options, reached the highest level since October 2011.
On the effects of stock markets, IG market analyst Joshua Mahony said that the fall once again in oil prices yesterday clipped the ambitions of the market bulls who believe that the stocks rout since the start of the year has gone too far.
“The rally in gold over the past 24 hours highlights the fact that many are donning their tin hats in anticipation of yet another rout for risk assets.
“The resilience of gold, in the face of booming markets earlier this week, points towards a growing feeling that gold is fast becoming a go-to investment to express risk-aversion in a low interest environment,” he said.
Analysts say that even after any deal that the concerns over a British referendum on Brexit will weigh on sterling for some time.
“Much like the Scottish referendum, the divisive nature of the issue at hand means grievances are unlikely to disappear upon obtaining any token concession from the European summit,” Mr Mahony said.
In Dublin, Transport Minister Paschal Donohoe told the annual conference of the British-Irish Chamber of Commerce that Ireland’s and the EU’s interests are for the UK to stay in.
Paul Drechsler, president of the Confederation of British Industry, said “the alternatives to full [UK] membership would also mean a period of dislocation”.
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