Sterling sheds gains against dollar as Brexit fears weigh
The pound shed early gains against the dollar this afternoon as concerns over Brexit coupled with dire UK economic data weighed on sterling.
Sterling has been edging lower this week after rising 3.9 per cent against the dollar in last week’s rally. Having recovered briefly this morning to touch $1.2653, the pound soon flattened back to $1.2599 by 2.40pm.
The weakening came after the British government “formally confirmed” to the EU that it will not extend the Brexit transition period beyond the end of this year, as well as new data showing the British economy shrank over 20 per cent, the largest amount on record, during April.
Announcing that the transition period would not be extended, Cabinet Office minister Michael Gove said “the moment for extension has now passed”.
Analysts suggested sterling was behaving like a risk currency, strengthening when improving global market sentiment weakens demand for the safe-haven dollar.
Vasileios Gkionakis, head of forex strategy at Lombard Odier, said the pound’s losses this week made sense because market participants had been complacent in view of ongoing Brexit risks and the coronavirus-induced economic slump.
“Little progress has been made on Brexit… the UK economy is going to lag the rest of the developed markets, so levels at $1.27-$1.28 were a bit of a stretch for sterling,” he added.
MUFG analyst Lee Hardman said the pound’s relative resilience recently “may reflect the fact that it has lagged other recovery trades after a particularly poor performance last month even as risk sentiment was improving more broadly”.
“The pound’s recovery from the Covid-19 shock has been held back recently by
fresh concerns over the possibility of negative Bank of England rate policy and a lack of progress in Brexit talks,” Hardman continued.
With both issues set to come into focus next week with the latest BoE policy meeting and further Brexit discussions between UK and EU leaders, Hardman warned that sterling volatility could increase in the coming week.