Sterling holds near 30-month lows as Johnson's majority shrinks

Sterling holds near 30-month lows as Johnson's majority shrinks
August 3, 2019, 10:42 am

Sterling held close to 30-month lows against the dollar on Friday as a shrinking of Britain’s ruling Conservative Party’s majority in parliament added to worries over domestic politics three months before Britain is due to exit the European Union.

Britain’s pro-European Union Liberal Democrats won a parliamentary seat from the governing Conservatives, a blow to Prime Minister Boris Johnson in his first electoral test since taking office.

The loss reduces Johnson’s working majority in parliament to just one, ahead of an expected showdown with lawmakers over his plan to take Britain out of the European Union on Oct. 31 with or without an exit agreement.

“For those that think that general election risk, in one form or another, is there for the pound in the autumn, then this marginally adds to that key story,” said Simon Derrick, head of currency research at Bank of New York Mellon.

“I don’t think it’s a particular surprise that the pound is under pressure again today.”

In late afternoon trade in London, sterling was flat at $1.2128, not far from a 30-month low of $1.2080 hit on Thursday.

It was 0.2% lower against a broadly stronger euro at 91.61 pence.

For most of Friday, sterling flitted between positive and negative territory, lacking any clear direction.

“August trade is beginning to assert itself in terms of declining volumes and slightly lower volatility,” said Fiona Cincotta, senior market analyst at City Index.

Sterling has been pressured in recent days by a stronger dollar, renewed worries about a no-deal Brexit and reduced Bank of England forecasts for British economic growth.

Dour economic data continued to stream in, with activity in Britain’s construction industry shrinking for a third month in a row in July as Brexit worries hit building projects, amid concerns that the slowdown could soon spill over into other areas of the economy, according to a survey.

Sterling shed more than 4% of its value in July, its worst month since October 2016, following Johnson’s vow to leave the European Union on Oct. 31 whether or not a transition deal can be agreed with Brussels.

Bank of England Governor Mark Carney said on Friday that some major industries could become unviable if Britain leaves the European Union without striking a deal with the bloc, adding that this was now a real prospect.

The possibility of a no-deal Brexit has driven significant underperformance in UK equities and real estate, and saddled British companies looking to borrow overseas with a ‘Brexit premium’.

Nevertheless, some investment managers with long horizons are taking a second look and concluding that — at least on paper — some British assets look too cheap to ignore.

Reuters.

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