July 10, 2020 / 4:14 PM / 25 days ago

Investors keep away from sterling in uncertain times

Sterling traded higher versus the U.S. dollar but was unmoved against the euro on Friday, with investors mostly staying on the sidelines.

An employee is seen walking over a mosaic of pound sterling symbols set in the floor of the front hall of the Bank of England in London, in this March 25, 2008 file photograph. Weakness in the sterling currency is a "foretaste" of what the impact would be if Britain voted to leave the European Union at an upcoming membership referendum, Foreign Secretary Philip Hammond said on February 25, 2016. REUTERS/Luke Macgregor/files

So far little has been achieved in negotiations between Britain and the European Union on a trade deal following Britain’s departure from the bloc.

This leaves sterling traders unsure how to approach the pound and the currency driven mostly by external factors.

Stephen Gallo, currency analyst at BMO Capital Markets, thinks the pound will weaken given that countries that are net exporters have an advantage over Britain.

“The UK’s trade policies will be in flux beyond 2020. What 2020 will do is create a starting point for UK/EU-27 trade adjustments going forward,” Gallo said, adding that “regulatory alignment, dispute arbitration and trade friction are likely to crop up as issues over the medium-term”.

“We would be inclined to fade sterling strength versus the euro on a move back to 0.8650,” he said.

The pound was last flat at 89.43 pence versus the euro and up 0.4% against the dollar at $1.2648 as the greenback fell.

The trade-weighted pound has never recovered to its pre-Brexit referendum levels.

Britain is also facing challenges to reviving its economy, badly hit by the coronavirus.

Britain will suffer the sharpest peak-to-trough economic slump of any major economy this year, rating agency Moody’s said on Friday, and ramp up national debt as a share of GDP by nearly a quarter.

Though British shoppers returned to the high street in June as a lockdown eased, overall numbers were much lower than normal for the time of year, an industry survey showed on Friday.

Stress in financial markets could yet make a comeback, Britain’s finance industry said last month.

Reporting by Olga Cotaga; Editing by Angus MacSwan

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