Sterling in limited bounce against euro, dollar

Sterling bounced back a touch against the euro and the dollar on Wednesday after four days of steep losses.

Most analysts see the rebound as temporary, however, with more weakness likely if news headlines in coming days are seen as raising the probability of the UK crashing out of the European Union without any transition arrangements in place.

Wednesday's bounce was attributed to some end-month portfolio adjustments, coupled with the fact that a no-deal Brexit is still not fully priced into the currency.

By mid-afternoon, sterling was up 0.7 per cent at $1.2238 and 0.9 per cent up versus the euro at 90.99 pence. It has risen from a 28-month low of $1.2120, but is now down almost 4 per cent in July against the dollar. It is also on track for a third straight loss-making month versus the euro.

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“We are just seeing some stabilisation after very bad four days,” said Lee Hardman, forex strategist at MUFG. “[The bounce] doesn’t change the bigger picture, and the pound will continue to weaken but clearly it won’t be a one-way street.”

But MUFG now sees a no-deal outcome as more likely than not, having raised that probability to 60 per cent after Boris Johnson took over as UK prime minister last week with a promise to take the UK out of the EU by the October 31st deadline with or without a deal. Before that, it estimated the chance at 35 per cent, Mr Hardman said.

Probabilities

Neil Jones, head of European hedge fund sales at Mizuho, said the sterling plunge had been in response to investors raising hard Brexit probabilities to 35-40 per cent, but he too sees the actual probability at 50 per cent or more.

The sterling sell-off would resume, he added.

By mid-afternoon, sterling was up 0.7 per cent at $1.2238 and 0.9 per cent up versus the euro at 90.99 pence. It has risen from a 28-month low of $1.2120, but is now down almost 4 per cent in July against the dollar. It is also on track for a third straight loss-making month versus the euro. – Reuters