Tough Brexit talk fuels sharp drop in sterling

Tough Brexit talk fuels sharp drop in sterling

Tough Brexit talk fuels sharp drop in sterling

As these follow on from stable inflation, rising wages and the lowest unemployment since 1975, Sterling traders have become more optimistic about the United Kingdom economy, thus providing some uplift for the pound today.

Sterling skidded to levels last traded in April 2017 on Tuesday, as investors anxious the next British prime minister would take the country on a course towards a no-deal Brexit.

Arch-Brexiter Boris Johnson is seen a shoo-in to be voted Conservative Party leader next week and hence become the next prime minister.

"Clearly the issues facing the United Kingdom now have not been faced in the last decade or so, even during the global financial crisis and the potential for the pound to hit the 2016 lows is there", said BNY Mellon senior currency strategist Neil Mellor in London. Total hours worked rose 1.9% from a year earlier between March and May, while data last week showed GDP increased just 1.7%.

The pound has lost 6% of its value against the currency since the start of May, meaning the amount of euros United Kingdom tourists receive when exchanging £500 has fallen from around 580 to 555. It was already the worst performing G10 currency in the second quarter. Even with signs of relative strength in the United Kingdom economy, which the European Commission expects to grow by 1.3pc this year and so outperform Germany, the pound has been weighed down by Brexit. It lost 0.2% against the euro to trade at 90.51 pence, a new six-month low EURGBP=D3 .

Traders' fears seem justified, with Britain's Brexit minister, Stephen Barclay, telling lawmakers on Wednesday no-deal risk was "underpriced".

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Johnson and Hunt both made their opposition clear to the Northern Irish backstop during the debate.

The backstop is meant to prevent the return of a hard border between European Union member Ireland and British province Northern Ireland.

Measures of expected pound swings over the next three and six months, covering the run-up to and the aftermath of the October 31 Brexit deadline, have surged to the highest among Group-of-10 currencies.

The U.S. currency rose to a six-week high of 108.990 yen last week but slid after Federal Reserve Chairman Jerome Powell set the stage for a rate cut later this month by highlighting uncertainties facing the world's largest economy.

"While sterling's recent underperformance is mostly related to a rising political risk premium, weak economic data have also played their part", he said.

Net short sterling positions are at $5.69 billion, having grown for four weeks straight, according to the Commodity Futures Trading Commission.

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