Sterling on track for weekly losses on Brexit worries

[LONDON] Sterling was subdued on Friday, shrugging aside better-than-expected services sector data and staying on track for its worst weekly performance since late March on worries about Britain's future in the European Union.

Markit's services activity index rose to 53.5 in May from 52.3 in April. That was stronger than the median forecast of 52.5 in a Reuters poll of economists but still one of the weakest readings for the sector in three years, Markit said.

Britain's economy looks set to grow by 0.2 per cent in the second quarter, stronger than the outlook a month ago but still a slowdown from growth of 0.4 percent in the first three months of 2016, Markit added.

Sterling eased against the US dollar to US$1.4420 and fell 0.1 per cent against the euro to trade at 77.36 pence per euro. Sterling's trade-weighted index was lower at 86.8, not far from a two-week low of 86.6 struck on Wednesday.

"The market remains comfortably short sterling given the itchy feeling in the wake of the Brexit referendum," said Ipek Ozkardeskaya, market analyst at London Capital Group.

The focus now turns to US non-farm payrolls report due out later in the session. Traders said a robust number is likely to lift the US dollar and could see the pound visit this week's low of US$1.4385, which was its lowest since May 16.

Sterling has been weighed down since late last year by worries over the June 23 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.

Data released on Wednesday showed the manufacturing sector was barely expanding in May due to the uncertainty over the referendum.

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 28 per cent on Friday, 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/US dollar implied volatility - a gauge of how sharp swings will be over the June 23 referendum date - traded at 20.1 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