(Updates with dip back below $1.30)
By Patrick Graham
LONDON, Sept 20 Worries about the political and
economic risks from Britain's pending exit from the European
Union drove sterling to a five-week low on Tuesday in markets
thinned by anticipation of U.S. and Japanese central bank
After a solid start, sterling slid 0.5 percent to $1.2960,
its weakest level in five weeks against the dollar. It also lost
0.6 percent to 86.22 pence per euro.
While the economy has ridden out the immediate aftermath of
June's vote to leave the EU better than financial markets had
expected, the past week has brought the first serious
discussions of the terms on which it will leave.
"The noise on Brexit over the past week has given us more
reason to sell any rallies," said Tobias Davis, head of
corporate treasury sales at Western Union in London.
"$1.33 was viewed as a short term uptick by most in the
market and a decent enough level to sell."
There was no obvious catalyst for Tuesday's moves but
dealers said it was big picture worries over Brexit.
"The market in general is just starting to think that
although it wasn't a complete disaster in the first couple of
months, all of the big problems are still ahead of us," the head
currency dealer with one large custodial bank in London.
The head of Germany's Bundesbank warned on Monday that banks
based in Britain would lose "passporting" access to EU markets
after Brexit unless the country remains in the broader European
trading group that includes nations such as Norway.
London's huge financial sector accounts for around 10
percent of the UK economy as a whole.
According to figures compiled by sector regulator the
Financial Conduct Authority (FCA), 5,476 UK-regulated financial
firms use passporting rights to operate in other EU countries.
But 8,008 EU firms also used them to sell services in Britain.
The custodial bank dealer - who asked not to be named - also
pointed to the lack of support for the pound below post-Brexit
vote low of $1.2798 but underlined that pricing was not there
"It always looks heavy at the bottom and I do think this
move might be a bit overdone. There is uncertainty, but that
works both ways," he said.
This week's big focus is the Bank of Japan and U.S. Federal
Reserve meetings both ending on Wednesday, with expectations
higher for action by the former as it battles a strong yen and
long-running low inflation.
That follows a Bank of England meeting last that stuck with
a warning about the risks to the economy of the Brexit talks,
saying it may still need to cut interest rates again this year.
Positioning data suggests investors have become net slightly
less negative on the outlook for the pound in the past week
while still holding massive "short" bets that leave them exposed
to any rise.
Analysts from Dutch bank ABN Amro said they had upped their
forecasts for the pound for the end of the year.
"With positions being this substantial, other positive
surprises in UK macro-economic data will likely result in an
enormous squeeze of these net-short sterling positions," ABN
analyst Georgette Beale said.
"Our year-end forecasts for EUR/GBP and GBP/USD are 0.83 and
1.33, respectively. The risk is tilted towards the upside."
(Editing by Jermey Gaunt)