Sterling rises from two-week lows as markets strengthen

Sterling inched off two-week lows on Thursday helped by a recovery in stock markets, although the cost of hedging against sharp swings in the currency remained high on concerns over Britain's future in the European Union.

Traders said a softer-than-expected construction sector survey had a fleeting impact on the currency, which has been plagued by worries over Brexit.

Markit said its monthly survey of construction purchasing managers showed the weakest overall growth in activity growth since June 2013, with its headline construction PMI dropping to 51.2 from April’s 52. Economists in a Reuters poll had expected the index to hold steady at 52.0 in May.

Data released on Wednesday showed the manufacturing sector was barely expanding in May due to uncertainty over Britain’s referendum on EU membership.

“There was very little reaction to the PMI data which suggests that the currency is hostage to Brexit related polls,” said Richard Falkenhall, currency strategist at Nordic bank SEB.

Against a trade-weighted basket of currencies, sterling was at 86.7, having hit 86.6 on Wednesday, its lowest since May 18. Against the dollar, sterling was 0.2 per cent higher at $1.4442, having fallen to $1.4385 on Wednesday, its lowest in two weeks.

The euro was flat at 77.60 pence, with traders awaiting the European Central Bank meeting.

Sterling has been weighed down since late last year by worries over the June 23rd referendum on EU membership. Britain’s hefty current account deficit - 7 per cent of output in the last quarter of 2015 - makes the economy, and the currency, vulnerable to any pull-back in investment flows.

Because of such a sizeable current account deficit, sterling tends to move in line with riskier assets. European stocks rose, aided by higher oil prices, and which in turn lent support to riskier and higher-yielding currencies.

Chris Turner, head of currency strategy at ING said that for the euro to push higher against the pound, the single currency would have to rise after the ECB meeting, or a new Brexit poll would have to be published. He noted that sterling has been weighed down since polls over the weekend veered towards the “Leave” campaign.

While a YouGov poll published on Wednesday showed British voters evenly split between “Remain” and “Leave”, two surveys the previous day - one online and one conducted via telephone - showed a move towards leaving the EU.

Bookmakers shortened their odds on a Brexit, with betting website Betfair putting the chances of a vote to leave at around 27 per cent on Thursday, having shown around a 17 per cent chance last week after several polls put the “In” camp ahead.

Reflecting the nervousness, the one-month sterling/dollar implied volatility - a gauge of how sharp swings will be over the June 23rd referendum date - traded at 20.40 per cent, having risen to 21 per cent on Wednesday, its highest level since the depths of the global financial crisis in early 2009.

Reuters