Sterling records worst week in five, Brexit fears back in focus

[LONDON] Sterling slipped against the US dollar and euro on Friday and was on track for its worst week in five on a trade-weighted basis, as investors worried about Britain's vote to leave the European Union and bet on another cut in interest rates this year.

The Bank of England kept rates at their record lows at Thursday's policy meeting but signalled that it would cut them again before the end of the year. It cut rates to 0.25 per cent in early August and relaunched an asset-purchase programme to cushion the economic blow from Brexit.

Since then, though, economic data pointed towards a less significant hit to the British economy than had been expected. That helped lift sterling to a seven-week high of US$1.3445 last week, more than 5 per cent above the three-decade low it had plumbed in the aftermath of the vote.

But with the British parliament back in session and focus returning to the uncertainty surrounding the UK's negotiations to leave the bloc as well as the prospect of further monetary easing, sterling has since slipped almost 2 per cent.

It fell 0.3 per cent on Friday to US$1.3203.

"Whereas a month ago the market was in a phase of relief that the impact of the referendum hadn't been that big after all ... I think there is now more of a focus on the fact that Brexit hasn't actually begun yet, and there could still be a rocky ride for the economy," said Rabobank currency strategist Jane Foley.

Sterling also fell 0.2 per cent to 85.12 pence per euro. Against the BoE's trade-weighted basket of currencies, it was down 0.8 per cent for the week - the worst performance since early August.

"Euro/sterling still flirts with the 0.85 mark," wrote Commerzbank strategists in a note to clients.

"The outlook is dominated by the government's plans for Brexit. And they are still unknown. As long as that remains the case long positions in sterling entail significant risks."

REUTERS