Traders signal further fall in sterling against dollar

Sterling held its steepest decline in more than six years as data confirmed that the UK economy gained momentum at the end of last year.

Sterling was little changed against the dollar yesterday after falling 3.3% in the previous three days, the biggest drop since June 2009.

UK GDP rose 0.5% in the fourth quarter, up from 0.4% in the three months to September, and in line with the median forecast of economists.

Options markets signal that traders are positioning for a further drop in sterling.

The premium for options protecting against a decline in the UK currency versus the dollar, compared with those insuring against an increase, was 3.75 percentage points.

That is the most since May 2010, when an inconclusive general election led to the formation of the UK’s first postwar coalition.

The UK currency has tumbled this year amid concern that Britain will vote to leave the EU.

Sterling’s performance depends on “the expectation of economy’s future performance, with Brexit risks being increasingly factored in”, said Ipek Ozkardeskaya, a markets analyst at London Capital Group.

It was at $1.3929 in London trading and was little changed at 79.14 pence per euro.

Sterling has weakened against all of its 16 major peers this year.

It appreciated against the euro in 2015, a move which hurt some British companies.

Rentokil, a London-based business services company, said this week that sterling’s strength versus the euro last year had “negatively impacted” its profit before taxes.

Molins, a maker of cigarette-rolling machines and packaging equipment, also reported the pound’s ascent last year had “exacerbated” a reduction in demand from the tobacco industry.

Sterling may sink to and even fall below $1.35, a level last seen in 1985, a majority of the economists in a survey by Bloomberg predicted.

Some forecast it to immediately drop below $1.20 should the UK vote to leave the EU in June.

Declines in the pound “will likely extend a few more days as investors globally reconsider their Brexit-related trading strategies”, Morgan Stanley currency strategists said.

Europe shrugs off pre-G20 China stocks slump, sterling steadies: https://t.co/NX2KhsShuO pic.twitter.com/4mpglWJvX2

— Reuters (@Reuters) February 25, 2016