Against euro in particular, sterling has more room to slide, says BNY Mellon analyst
The British pound slumped to a level not seen since October 2017 versus the euro on Wednesday, and this could open up the ailing U.K. currency to even more pain, wrote Simon Derrick, chief currency strategist at BNY Mellon. The euro EURGBP, +0.5690% breached the psychologically important level of £0.90 earlier on Wednesday for the first time in 10 months, rising to a high of £0.9018. The shared eurozone currency last bought £0.9006, up from £0.8965 late Tuesday in New York. Against the U.S. dollar, the GBPUSD, -0.3942% it a one-year low on Wednesday. “Given the pound’s long-standing propensity to trend aggressively and the fact that it is threatening to move into historically more volatile territory during thinner August trading conditions, the risk is that a move beyond £0.90 could spark a rapid acceleration higher in the price of the euro,” Derrick said. During times with lower volumes, pricing can move more erratically. The euro-sterling pair has only seen a few trading days above that benchmark since the euro’s inception in January 1999, Derrick said. “Not only has the territory above £0.90 been infiltrated relatively infrequently, it has also tended to see significantly higher levels of realized volatility,” he added. The euro’s all-time closing high versus the U.K. currency was £0.9746 on Dec. 30, 2008, Derrick wrote. A sharp weakening of the pound versus its eurozone rival could then become a political issue itself, Derrick warned. “One risk from a rapid weakening of sterling from current levels is that it could trigger a spate of headlines in the U.K. media,” he said. The ailing pound led to higher U.K. inflation, which last stood at 2.4% in June, above the Bank of England’s target of 2%. The higher consumer prices factored into the BOE’s decision to raise interest rates last week, which should ordinarily have supported the pound. But not this time. That said, with little intervention — verbal or otherwise — since the pound began its tailspin after the Brexit vote, having the currency slide further is clearly an option for politicians and policymakers, Derrick said. “Nevertheless, such a development could prove a complicating factor ahead of a September and October that are already filled with a number of potential stumbling blocks for sterling,” he added. The coming months will feature continued Brexit discussions between London and Brussels, in an effort to salvage the relations and avoid a so-called ‘hard Brexit’ in which no predefined roadmap would be in place by the time the U.K. officially leaves the European Union in March 2019. Moreover, U.K. Prime Minister Theresa May’s shaky cabinet is at risk after she saw a slew of resignations earlier this summer.