Pound Drops to Five-Year Low as Risks to U.K. Economy Stack Up

Kit Juckes: Why You Should Short the British Pound
  • Britain faces `dangerous cocktail' of global threats: Osborne
  • Raft of disappointing data, `Brexit' talk weigh on sterling

There’s no respite for the pound.

Britain’s currency has fallen every day this week against the dollar and touched its lowest level since 2010 on Thursday. Sterling also reached its weakest in almost three months against the euro. Chancellor of the Exchequer George Osborne said a “dangerous cocktail” of global threats face the British economy this year and warned against complacency, speaking at an event in Cardiff, Wales.

Those perils were highlighted this week by turmoil in China, which has roiled global markets and led billionaire George Soros to warn the current environment has similarities to the financial crisis in 2008.

Manufacturing and services data that missed economists’ estimates this week signaled the U.K.’s domestic economy was faltering and this may result in the Bank of England keeping its benchmark interest rate unchanged for longer.

Markets aren’t fully pricing in a quarter-point increase to the BOE’s 0.5 percent main rate until after February 2017, while ING Bank NV and Goldman Sachs Group Inc. have this week both pushed calls for a BOE rate increase to the last quarter of 2016 from previous estimates of the second quarter.

“Sterling is everyone’s favorite currency to sell at the moment,” said Neil Mellor, a senior foreign-exchange strategist at Bank of New York Mellon Corp. in London. “You have economic news veering on the more negative side, then you have Osborne talking about all the various shocks the U.K. faces and the ‘Brexit’ debate. It is hard to refute the fact that is definitely on the radar now,” he said, referring to a potential British exit from the European Union.

The pound fell 0.4 percent to $1.4574 as of the 5 p.m. London close, and earlier reached $1.4534, its lowest since June 2010. Sterling depreciated 1.1 percent to 74.52 pence per euro, having earlier touched 74.70 pence per euro, its weakest since October.

Brexit Concern

Even before the terms or date of a planned referendum on Britain’s EU membership become clear, markets are driving sterling lower. The slide comes as British Prime Minister David Cameron tries to renegotiate the U.K.’s role in the EU with German Chancellor Angela Merkel and her political allies. He said on Thursday that he wants the U.K. to be part of a “reformed European Union” and not be at a disadvantage outside the euro zone.

If the currency closes below the 2015 low of about $1.4566, it could fall further as “there is not a great deal in terms of technical support, until you go to around $1.4250 back in 2010,” BNY’s Mellor said. “It’s make or break what happens today.”

The yield on benchmark 10-year gilts was little changed at 1.80 percent. It earlier reached 1.731 percent, its lowest since Dec. 2. The price of the 2 percent security due September 2025 was 101.735 percent of face value.

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