Speculator bets against sterling hit record highs
Sterling remained under pressure yesterday amid a deepening worry among investors about the prospect of a 'hard' Brexit.
The pound hovered around the 90 pence to the euro mark yesterday following a sharp weakening last week which culminated in Friday's so-called 'flash crash' that saw the UK currency briefly weaken dramatically.
The currency was slightly calmer than last Friday when the 'flash-crash' wiped out a tenth of its value in a matter of minutes in Asian trade, but sentiment towards the pound remained gloomy with speculators' bets against it at record highs.
Reuters reported that sterling's trade-weighted index fell to its lowest since early 2009 yesterday, extending the hefty losses seen last week.
HSBC last week reiterated its view that the pound will hit parity with the euro by the end of next year.
Sterling has been falling steadily for a fortnight, as investors fret that the UK government's intention to prioritise immigration controls over access to the European Single Market in exit talks will spark deeper cuts to foreign investment in Britain.
"'Hard' Brexit fears are unlikely to abate anytime soon and in the near term there is scope for another 2-3pc risk premium to be built into sterling/dollar and euro/sterling," said Chris Turner, head of currency strategy at ING.
He said last week saw an estimated 4-5pc risk premium being priced in as per the company's financial models.
When investors are nervous or cautious about putting money into country's assets they demand higher premiums for their investments which often can lead to a cheaper or weaker currency.
Traders said sentiment was unlikely to turn around soon with the options market indicating some more weakness.
Six-month sterling/dollar risk reversals, capturing the date by which Britain is expected to formally begin the process of leaving the EU, showed a bias for more weakness. (Additional reporting Reuters)