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Sterling in Trouble: Eighth Day of Losses Takes GBP to 3-Month Low

The British pound fell on Wednesday towards a 3-month low against the euro and US dollar as attention turned back to Brexit and after lower-than-expected wage growth lessened prospects for a Bank of England rate hike.

Posted May 15, 2019

The British pound was down on Wednesday for an eighth consecutive day against the euro, with collective losses now taking the currency to just €1.145 — the lowest exchange rate since mid-February.

Also reaching a 3-month low was pound-to-US dollar. After 7 losing days from the past 8, that was quoted at $1.283.

Sterling weakness has returned following an apparent breakdown in cross-party Brexit talks between the Conservatives and Labour, which has revived chances for “no deal.”

The latest high-risk strategy to be deployed by British Prime Minister Theresa May involves once again asking the House of Commons to vote on the withdrawal agreement negotiated with the EU and already rejected by MPs three times. Another meaningful vote will take place during the week beginning June-3, it has been announced.

It has been suggested that this strategy reflects Mrs May’s hopes that a severe bashing for Conservatives in this month’s European Parliament elections will be sufficient to persuade leave-voting MPs to support her plan. The risk here, says Scotiabank’s Shaun Osborne, is that “MPs will be so fed up with her leadership that rallying around her plan is the last thing on their mind.”

Undoubtedly, a no-deal exit, which could prompt a 15 percent decline in the pound’s value according to some analysts, is once again a live scenario; the UK’s Brexit minister Stephen Barclay hinted as much on Wednesday when he told lawmakers that no-deal was “under appreciated.”

Barring a revoking of Article 50 — i.e. cancelling Brexit altogether — it’s difficult to see how the UK avoids a no-deal exit at the end of October if the withdrawal bill is not passed at the fourth attempt. A further defeat is considered highly likely, with MPs on all sides vowing to vote the bill down, and could make Theresa May’s position untenable, leaving the door open for a hardline Eurosceptic to become Britain’s prime minister.

For the pound, not helping matters has been this week’s deterioration in risk appetite induced by an escalation in the US-China trade row. Monday saw tariff retaliation by China against the US and preparations are underway by Washington for further tariffs that would touch every consumer product imported from the Asian giant. These developments could do significant harm to the global economy and are making investors uneasy.

Moreover, data on Tuesday showing UK wage growth of 3.2 percent year-on-year, down from growth of 3.5 percent a month earlier, will take pressure off the Bank of England, and that’s detrimental to pound valuations. It had been feared that accelerating wage growth would ramp up inflation, making higher interest rates necessary. Higher interest rates might have raised the pound’s value since interest-seeking “hot money” usually increases currency demand.

With such obvious uncertainties in play, analysts are reluctant to offer GBP forecasts. It is perhaps telling, though, that longstanding pound supporter Nomura has decided this week to terminate its buy recommendation on the currency.

Please note that the opinions of our authors are their own and do not reflect the opinion of Best Exchange Rates and should not be taken as a reference to buy or sell any financial product.