May 12, 2020 / 8:23 AM / 18 days ago

Sterling extends fall to 20-day low versus euro

LONDON (Reuters) - Sterling extended Monday’s losses on Tuesday, hitting a 20-day low versus the euro, as continued confusion over government plans to ease lockdown measures, the worst COVID-19 death toll in Europe and revived Brexit risks all weighed on the pound.

FILE PHOTO: Pound banknotes are seen in this illustration taken January 6, 2020. REUTERS/Dado Ruvic/Illustration

Britain extended its job retention scheme, in which the government pays 80% of furloughed workers’ wages, by another four months until the end of October.

The announcement did little to move the pound, which is the worst-performing G10 currency so far this month, held down by concerns about the government’s handling of the crisis.

Official data published on Tuesday showed Britain’s death toll from COVID-19 topped 38,000 as of early May, having overtaken Italy as the worst affected country in Europe. Prime Minister Boris Johnson’s plans for easing the lockdown have meanwhile been widely criticised as unclear.

Rabobank’s head of FX strategy Jane Foley said international investors were likely to have been deterred by that lack of clarity and the government’s slowness to carry out COVID-19 testing and provide protective equipment for healthcare staff.

“Insofar as we do have a current account deficit in the UK I think we always have to consider how the UK appears from the point of view of an overseas investor,” she said.

“From a political point of view in the UK, there really hasn’t been anything particularly positive.”

The United Kingdom is racking up new debt at a furious pace: it is due to issue 180 billion pounds of government debt between May and July, more than previously planned for the entire financial year.

The country’s debt mountain exceeds $2.5 trillion and its public sector net borrowing could reach 14% of gross domestic product this year, the biggest single-year deficit since World War Two.

The pound extended Monday’s losses against both the dollar and the euro. Versus the dollar, it was last at $1.2314, down 0.2% from New York’s close.

Against a stronger euro, the pound fell to its lowest since April 22 and was last down around 0.7% at 88.228 pence.

(Graphic: Sterling extends losses vs euro - here)

“STAY ALERT”

Johnson outlined the government’s changed advice about the lockdown in a televised speech on Sunday. A 51-page document published on Monday detailed the plans, followed by a series of sector-by-sector documents for employers and workers.

But the new measures were widely criticised for leaving it unclear whether Britons should return to work.

Adding to the confusion, leaders of the devolved administrations in Scotland, Wales and Northern Ireland made clear they did not share Johnson’s approach and rejected his new core message of “stay alert”, instead sticking to the previous “stay at home” slogan.

The market has turned increasingly short on the pound over the last 10 weeks, as the economic impact of the coronavirus pandemic — likely to be the worst recession in 300 years — is compounded by the risk Britain will end a post-Brexit transition period on Dec. 31 without a deal with the European Union.

Commerzbank FX strategist Thu Lan Nguyen said the government’s struggle to get to grips with the coronavirus pandemic did not bode well for its handling of trade talks with the EU, and advised clients to be cautious on sterling.

Britain and the EU started their penultimate scheduled round of trade talks via teleconference on Monday, having made little progress on any major sticking points.

Rabobank’s Foley said the fact investors were becoming more alert to the looming risk that Britain will fail to reach a post-Brexit trade deal with the EU could be another reason for the pound trading at levels largely unseen since late 2016.

“There’s got to be a very significant risk that, on top of the worst recession for three centuries, you’re going to have confusion potentially at the border (in January),” she said.

“The UK government desperately needs some positive headlines.”

Reporting by Elizabeth Howcroft, Editing by Catherine Evans

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