Banks see more falls for embattled sterling

Sterling resumed its decline as investors waited for clues about the cause of last week’s flash crash and on whether Britain is truly headed for a hard Brexit.

Another major international bank also released new forecasts, predicting sterling could fall to 95 pence against the euro by the end of the year.

The currency slumped 4.2% last week, its worst performance since June 24, on the news that prime minister Theresa May planned by March to trigger Britain’s two-year withdrawal from the EU.

As the uncertainty over the form of Britain’s exit from the EU continues, JPMorgan strategists have reduced their sterling forecast.

They said that the downside risks to sterling have increased, reducing their year-end forecast to $1.21 from $1.32 and lowering expectations on the pound to 95 pence against the euro from 87 pence. The bank had previously upgraded its GDP forecast in September on better-than-expected economic data.

A few large banks have lowered their forecasts for the pound. HSBC said on Friday it forecast the pound to drop to $1.10 and parity against the euro by the end of 2017, citing growing uncertainty from Brexit.

Traders said sentiment was unlikely to turn around soon with the options market indicating some more weakness.

Ms May will meet with foreign leaders this week in a bid to build understanding for her negotiating position ahead of this month’s EU summit, and travelled to Denmark and the Netherlands yesterday.

“It’s difficult to know what new can come out of this,” said Stuart Bennett, head of Group-of-10 currency strategy at Banco Santander in London.

“The Europeans are sticking very much to their hymn sheet, which is no informal pre-Article 50 negotiations.”

The pound dropped 0.4% to $1.23 in London trade. Sterling was little changed at 90.03 pence against the euro. Last week’s slide culminated in an unexplained 6.1% plunge during about two minutes in Asian hours on Friday. The currency finished the day down 1.4%.

“The pound has been under depreciation pressure ever since the Tory party conference, in which May quite clearly signaled that the Brexit negotiations may end in a hard Brexit,” said Thu Lan Nguyen, a foreign-exchange strategist at Commerzbank in Frankfurt.

“You could see that clearly after the flash crash we had last week. Usually, such a flash crash, particularly in such a major currency, should be corrected immediately, but it didn’t correct entirely.”

The Conservative Party conference in Birmingham last week saw Ms May indicate that Britain would prioritise cracking down on immigration over keeping single market membership and EU laws.

An aide to Brexit minister David Davis provided more clarity on the government’s position when he said the UK had several red lines on which it would not compromise, including free movement of labour.

This position has so far failed to win support from Ms May’s European counterparts, who have accused the UK of trying to “cherry-pick” the parts of EU membership it wants.

Meanwhile, last week’s tumble and flash crash that traders speculated may have been caused by a mistaken order, or a so-called fat finger, led to companies downgrading profit forecasts. Sterling remains the world’s worst-performing major currency in 2016.