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Sterling steady, investors wary on Brexit campaign
[LONDON] Sterling was steady on Friday, trading not far from recent lows, and vulnerable to fresh bouts of uncertainty over whether Britain will stay in the European Union.
As the official campaign to the June 23 referendum got underway, opinion polls have indicated a tight race between the "Yes" and the "No" camps. Nevertheless, bookmakers are pricing in about a one-in-three chance that Britain will opt out of the union which it joined in 1973.
In one of its starkest warnings yet, the Bank of England on Thursday said a British exit from the EU would create uncertainty and probably damage the economy in the short run.
Sterling was steady at US$1.4160, while the euro was flat at 79.50 pence. Trade-weighted sterling was at 84.3, having fallen to a 28-month low of 83.3 last week.
"Pound weakness has been relentless so far this year and we don't expect it to reverse prior to the EU referendum," said Lee Hardman, currency analyst at Bank of Tokyo Mitsubishi.
"Momentum still remains strongly in favour of further pound weakness in the near-term. Trade-weighted pound has declined in ten out of the first fourteen weeks of this year extending its decline to just over 10 per cent since late last year. It is the most persistent and deepest sell-off for the pound since the global financial crisis."
Investors worry that leaving the bloc would cause huge damage to a country with a trade deficit of £12 billion, its widest in eight years, and a current account deficit that soared to 7 per cent of GDP in the final quarter of 2015.
Major banks expect sterling could lose around a fifth of its value if Britain votes to leave. The International Monetary Fund also waded into the debate this week saying a British exit would risk causing "severe global damage" that would drag down UK growth for years to come.
Amid all the uncertainty, the BoE ignored signs of inflation picking up to keep rates unchanged on Thursday. The nine-member committee voted unanimously to keep rates at record lows, quashing speculation that some could vote for rate cuts given all the uncertainty from the upcoming vote.
"Officials noted that referendum effects make macroeconomic data harder to interpret, suggesting that most of the indicators we get in the run-up to June may be of secondary importance to the Bank," said Charalambos Pissouros, analyst at IronFx Global.
"We believe that the BoE is likely to keep its rate powder dry, at least until the vote has concluded."