October 10, 2016 / 7:30 AM / a year ago

Sterling fails to shake off hard-Brexit blues

LONDON (Reuters) - Sterling slipped below $1.24 on Monday, extending last week’s heavy losses, as investors bet that Britain will undergo a “hard Brexit” - a total split from Europe’s single market.

A bank employee counts pound notes at Kasikornbank in Bangkok, Thailand October 12, 2010. REUTERS/Sukree Sukplang/File Photo

Trading in the pound was markedly calmer than on Friday, when a “flash crash” wiped out a tenth of its value in a matter of minutes in early Asian trade. But sentiment towards sterling remained gloomy, with speculators’ bets against it having reached record highs in the week to last Tuesday. [IMM/FX]

Losses accelerated last week on Brexit worries, after Prime Minister Theresa May set a March start date for formal divorce proceedings and expressed concern about loose monetary policy, which some saw as a thinly veiled attack on the Bank of England.

Market players think May’s government is leaning towards a “hard Brexit” - a scenario in which Britain gives up full access to the EU’s single market in order to impose maximum control on its borders. Some fear that could hinder trade and constrict the foreign investment needed to fund Britain’s huge current account deficit, one of the biggest in the developed world.

“It feels like the base case for market participants is that it’s going to be a hard Brexit,” UBS Wealth Management currency strategist Geoff Yu said.

“If the worst possible scenario for the UK has already been priced in, you could argue that maybe it’s time to go into some of the non-political risks and get back to the fundamentals, and if the UK continues to outperform, then the risk is to the upside. But we don’t know what a hard Brexit looks like.”

Sterling slipped as much as 0.6 percent to $1.2355 GBP=D4, leaving it down almost 5 percent over the past week and almost 17 percent weaker than before Britain's shock vote to leave the European Union on June 23. But that was more than 7 percent clear of the 31-year low of $1.1491 touched on Friday.

Against the Bank of England’s trade-weighted basket of currencies, sterling hit a 7-1/2-year low =GBP. It traded flat against the single currency on Monday at 90.05 pence.

“In the near term there is scope for another 2-3 percent risk premium to be built into sterling/dollar and euro/sterling,” ING head of currency strategy Chris Turner said, noting that last week saw an estimated 4-5 percent risk premium being priced in according to ING financial models.

A few large banks have lowered their forecasts for the pound. HSBC said on Friday it forecast that the pound would drop to $1.10 and parity against the euro by the end of 2017, citing growing uncertainty around Brexit.

Editing by Louise Ireland

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