Sterling was set for a record 10th week of consecutive losses against the euro as weak UK data and the growing possibility of British interest rate cuts in the event of a chaotic Brexit kept investors sidelined.
The British currency, however, was traded slightly higher in the London afternoon session, both against the dollar and the euro.
The possibility the Bank of England could raise rates has been one of the few supports for the pound in recent weeks, as the Federal Reserve, the ECB and other central banks turned dovish.
At the same time, concern has grown about a no-deal Brexit. The favourite to be the UK’s next prime minister, Boris Johnson, sees an October 31 deadline as set in stone, deal or no-deal.
“We expect the pound to continue weakening heading into the crunch autumn Brexit period,” said MUFG analysts in a note to clients. “The pound sell-off remains relentless with no clear end in sight.”
At a Thomson Reuters event, senior Bank of England official Gertjan Vlieghe said the central bank might need to cut rates almost to zero in the event of a no-deal Brexit and it was not clear how long it would take for them to rise again.
Mr Vlieghe also said that a scenario in which the Bank of England cuts rates “is more possible” than a scenario in which it raises rates. For those reasons the pound has struggled this week, notably against the dollar and the euro. Versus the euro, the pound was up slightly at 89.65 pence, but was on track for a record 10th consecutive week of losses.
That matters a lot to Irish businesses who export goods and services across the Irish Sea. Having been battered in the immediate aftermath of the UK vote three years ago, their profit margins can be wiped out when sterling falls.
However, some market watchers are turning optimistic towards the British currency after its recent drop.
In trade-weighted terms, sterling “already trades at crisis levels and typically struggles to go much lower”, said Jordan Rochester, currency strategist at Nomura.
“A no-deal Brexit is a risk and would certainly make new lows in sterling, but that’s still a few months away and we do not expect the market to assign a high hard Brexit premium until parliament returns after the summer break in September,” Mr Rochester said.
Moreover, with UK inflation expected to remain at the Bank of England’s target rate of 2% in June, according to economists, the bank should remain “on the sidelines for now until a new governor is chosen and in place in February 2020”.
- Reuters. Additional reporting Irish Examiner