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[LONDON] Sterling recorded its best daily performance against the euro in a month on Monday, climbing almost one per cent as stronger risk appetite across markets gave the currency a break from a brutal sell-off driven largely by jitters about a possible Brexit.
The pound has lost more than 7 per cent since the start of the year on a trade-weighted basis and last week hit a 2-1/2-year low, on worries that Britain will vote to leave the European Union at a referendum on June 23. Any sign that a Brexit is becoming more likely drives it lower.
Opponents of a Brexit say leaving the bloc would bode ill for a country whose trade deficit has ballooned to 12 billion pounds, its widest in eight years, and whose current account deficit soared to 7 per cent of GDP in the final quarter of 2015.
Data released by Commodity Futures Trading Commission on Friday showed speculators had added to bets against the pound in the week to April 5, increasing downward pressure on the currency.
But on Monday, as stocks and other risky assets rallied, sterling, whose current account deficit makes it vulnerable at times of risk aversion, was given a break from its sell-off.
It gained 0.7 per cent against the single currency to trade at 80.30 pence per euro, its strongest gains since March 11.
"Markets seemed to wake up in a better mood this morning and risk sentiment, for some reason, seems to be back in vogue. And so we've had a bit of a correction in sterling after what happened last week," said ING currency strategist Viraj Patel.
Mr Patel added that British inflation numbers for March, due to be released on Tuesday, were unlikely to move sterling much, even if they came in much stronger than expected, as economic data was not a key driver for sterling in the current market environment.
Having hit its weakest against the safe-haven yen since mid-2013 last week, the pound gained over one per cent against the Japanese currency as risk appetite drove it down across the board, which analysts said gave sterling a boost.
On a trade-weighted basis, sterling gained 0.8 per cent, and also rose 0.8 per cent against the US dollar, to US$1.4242.
But despite Monday's gains, analysts remain bearish on sterling over the longer term.
"The economic fundamentals are not looking good with the 7 per cent current account deficit, the 4 per cent budget gap and the UK household sector reporting a 2.3 per cent decline of its net savings in the fourth quarter, leaving us firmly within the sterling bearish camp," Morgan Stanley said in a note.
"Our favoured way to play this week is to be long euro/sterling."