Sterling sell-off against euro could start again

Sterling fell to its lowest level against the dollar since 2009 but was little changed against the euro at almost 76.5 pence after Bank of England governor Mark Carney yesterday signalled a boost to UK interest rates is still some way off.

However, sterling has significantly weakened against the euro from 72.5 pence just a month ago — substantially eroding a some of the benefits that have driven Irish exports into Britain for over a year.

Futures markets now predict only a 10% chance the Bank of England will hike interest rates this year, and may now await until 2017, said Philip O’Sullivan, chief economist at Investec Ireland.

That, and fears about the ‘Brexit’ referendum that could lead to Britain leaving the EU, have helped undermine the lofty standing of sterling in recent weeks.

Traders say sterling’s decline against the euro could resume.

Britain’s currency had been climbing before Mr Carney’s comments, buoyed by a report showing inflation accelerated last month to the highest in almost a year, but sterling reversed its gain versus the dollar, and fell against all but one of its 16 major peers, after Mr Carney used his first speech of the year to highlight global risks and persistent factors weighing on UK price growth.

Even before he spoke, forward contracts based on the sterling overnight index average, or Sonia, showed traders weren’t fully pricing in a quarter-point increase to the UK’s 0.5% main rate until after March 2017.

“It adds some weight to the idea of no rate cut until 2017,” said Neil Jones, the London-based head of hedge-fund sales at Mizuho Bank.

“I doubt if we are done yet for the pound sell off. I sense there’s a good chance for more downside.”

Sterling dropped as much as 0.3% to $1.4207, the lowest level since March 2009, and was down 0.2% at $1.4217 at one stage.

Euro hits a 12 month high against sterling https://t.co/GuEOJizBGT

— David Murphy (@davidmurphyRTE) January 19, 2016

It was little changed at 76.49 per euro, after surging 0.8% earlier.

Sterling initially jumped as much as 0.7% against the dollar, the most in six weeks, after the UK’s Office for National Statistics said annual consumer-price inflation quickened to 0.2% in December, compared with the Bank of England’s 2% target.

The core inflation rate, which excludes volatile food and energy prices, climbed to 1.4%.

Sterling has tumbled 7% against the dollar over the past two months amid a shaky economic recovery and the planned ‘Brexit’ vote on whether Britain will leave the EU.

“One average data point doesn’t really change the game or picture in terms of the UK inflation outlook,” Viraj Patel, a currency strategist at ING in London, said about the CPI report.

“Today has highlighted the key headwinds for sterling, which are a very soft inflation outlook, a dovish BOE and Brexit-focused risk. That’s why we had Carney come out a bit more dovish.”

Meanwhile, strong euro bullish sentiment in the option market, falling inflation expectations, renewed rout in global equities and the extended slump in oil prices may force the ECB president Mario Draghi to deliver a more dovish-than-expected message at the ECB policy meeting on Thursday.

Compared to the meeting on December 3, when Mr Draghi delivered a stimulus expansion that fell short of market expectations, the ECB this week may need to decisively reaffirm the ‘all it takes’ stance to ward off possibility of further euro strength and downplay fears of falling prices.