Sterling nears 10-year low as UK GDP shrinks

Sterling nears 10-year low as UK GDP shrinks

By Olga Cotaga and Tommy Wilkes

Sterling skidded again yesterday, almost equalling a 10-year low against the euro, after an unexpected second quarter contraction in the UK economy alarmed investors already fretting that the UK is headed for a no-deal Brexit.

The pound slid to 93p against the euro, a level only seen once before since 2009 when it hit 93.5p.

Sterling, which has also lost 3.7% of its value against the dollar since arch- Brexiteer prime minister Boris Johnson’s arrival in office in late July, sank to $1.2056, the weakest it has been since January 2017.

The British currency has been close to being the worst performing in the developed world in the past couple of weeks since Johnson became prime minister on July 24.

The UK’s economy shrank at a quarterly rate of 0.2%, the first contraction since 2012 and below all forecasts.

Year-on-year economic growth slid to 1.2% from 1.8% in the first quarter, the UK’s Office for National Statistics said, its weakest showing since the start of 2018.

British government bond yields fell as investors sought safety in fixed income assets. UK domestic stocks weakened, and London’s export-heavy blue chip Ftse-100 index dipped as sterling plunged.

Some investors now expect the UK to enter a technical recession, which represents two consecutive quarters of negative growth, if the economic situation continues to worsen.

“Overall, these are clearly a disappointing set of figures which have significantly raised the likelihood of a technical recession,” said Azad Zangana, senior European economist and strategist at Schroders.

The pound has suffered a torrid few weeks as investors priced in the growing risk of the UK exiting the EU under Johnson on October 31 without a deal to smooth the transition.

BNP Paribas raised the probability of a no-deal Brexit to 50% from 40%. Some analysts say there could be more pain to come.

“As the political risk premium rose, sterling was the worst-performing major currency in each of May, June and July, but the negative risk premium can still rise further,” RBC Capital Markets analyst Adam Cole said.

Johnson is planning to hold a parliamentary election in the days after Brexit if politicians sink the government with a no-confidence vote, British media has reported, further unnerving currency traders.

It is growing increasingly likely that Johnson will face a vote of no confidence soon after September 3, when parliament returns from its summer recess, analysts say.

Johnson says the UK must leave the EU on schedule on October 31, with or without a divorce deal with the bloc.

The shrinking economic growth in the second quarter did not make investors more confident that the Bank of England will cut interest rates in September.

Some economists expect the UK’s central bank to embark on more easing soon, however. “As uncertainty continues to loom over the UK economy, the difficult run of data is expected to continue and the Bank of England will need to consider its next step carefully as its global peers embark on further rate cuts,” said Geoffrey Yu, head of the UK Investment Office at UBS Wealth Management.

Money markets are pricing in a 25 basis point cut by January 2020.

Reuters

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