Sterling plunges to a 27-month low

If implemented, the UK would follow many EU rules until arrangements are made to avert a hard border.

“The market is pricing in a higher probability of a no-deal Brexit and an increase of economic pressure…. You have the perfect storm for sterling,” Gkionakis said.

The British currency weakened 0.8% on Tuesday to $1.2409, the lowest since April 2017, mirroring the “flash crash” on January 3. Against the euro the pound fell 0.5% to a low of 90.42p, the lowest since January 11.

The weakness extended even after employment data showed average weekly earnings unexpectedly rose 3.4% year on year in the three-months to May. However, the labour market strength is widely attributed to employers hiring workers who they can later lay off if needed.

Employment growth slowed to post the weakest increase since the three months to August 2018, in a sign that labour market may soon start feeling the heat.

Money markets are now pricing a roughly 50% chance of a Bank of England  rate cut by end-year, having increased their bets after recent comments by governor Mark Carney were viewed as dovish.

Nomura strategist Jordan Rochester attributed the pound’s lurch lower to investors’ renewed interest in hedging sterling risks.

“The FX market already has a sizeable short sterling positioning on. But I am worried that volatility is starting from a very low base and hedging flows will be picking up further,” Rochester told clients.

According to data from the Commodity Futures Trading Commission, the week to July 9 saw speculators increased net short sterling positions to $5.69bn — the fourth consecutive week of increase.

Implied volatility in sterling measured by the cost of six-month options contracts, which encompasses the October 31 Brexit deadline, rose to a five-week high. 

But despite the clock ticking down to October, most investors believe a deal will eventually be reached.

Only 20% of respondents surveyed by Bank of America Merrill Lynch expect the UK to leave the EU on or before the current October deadline and about 60% put the probability of a no-deal Brexit below 40%.

Reuters

Source: businesslive.co.za