Sterling falls vs stronger euro as minds turn to BoE

[LONDON] Sterling fell more than half a per cent against a broadly stronger euro on Thursday, 3,000 job cuts at British bank Lloyds underlining concerns that the UK economic outlook will only worsen in the months ahead following June's Brexit vote.

Minds are already turning to next week's Bank of England meeting, which is widely expected to cut the official interest rates investors get for holding the pound by at least a quarter point from a record low of 0.5 per cent.

Yet since the 14 per cent fall in the pound in the hours after the vote to leave the European Union on June 23, sterling has proved more robust than many major banks' forecasts and derivatives market indications of its future value are now far more balanced.

"Ultimately you are trading a broader range now," said Manuel Oliveri, a strategist with French bank Credit Agricole in London. "In order to trigger a proper (upward) trend we would need an improving capital flow situation or a turn higher in market interest rates and that is not going to happen. But the currency is not moving lower - and that may give us some indication that we have reached oversold territory."

In early trade in London, the pound fell 0.6 per cent to 84.06 pence per euro. Alone among the major currencies, it was also marginally lower against the dollar at US$1.3212, having slipped from highs of US$1.3250 hit after the US Federal Reserve's statement on policy on Wednesday.

Former BoE policymaker David Blanchflower was the latest voice to suggest the Bank may cut rates into negative territory in an article in the Guardian newspaper on Thursday. British banks have already begun to tell savers that they may start charging them for depositing cash.

Interbank money markets, however, have yet to price in a cut in official rates into negative territory, conscious of past warnings from the bank that such rates might be counterproductive given the structure of UK banking.

"Mr Blanchflower's comments nonetheless highlight that if we see very soft data over the next few months, then the market could start to price negative rates as a tail risk," analysts from BNP Paribas said in a morning note. "Our economists think the BoE will cut by 25bp next week and announce GBP 50bn of asset purchases."

REUTERS