- Chance of recession triples if U.K. leaves the EU: survey
- BOE's Cunliffe says officials must be ready to act if needed
The pound held its steepest decline in more than six years as data confirmed that the U.K. economy gained momentum at the end of last year.
Sterling was little changed against the dollar Thursday after falling 3.3 percent in the previous three days, the biggest drop since June 2009. Gross domestic product increased 0.5 percent in the fourth quarter, up from 0.4 percent in the three months through September, and in line with the median forecast of economists in a Bloomberg survey.
The U.K. currency has tumbled this year amid concern that Britain will vote to leave the European Union, hampering trading and discouraging foreign investment. If the nation quits the world’s biggest single market in a June 23 referendum, the probability of a recession would triple, respondents to a Bloomberg survey said. Bank of England Deputy Governor for Financial Stability Jon Cunliffe said late Wednesday that risks to the U.K. outlook have increased and policy makers must be ready to act if needed.
The pound’s performance depends on “the expectation of economy’s future performance, with ‘Brexit’ risks being increasingly factored in,” said Ipek Ozkardeskaya, a markets analyst at London Capital Group Ltd. “The pound has reacted badly to ‘Brexit’ risks and there is clearly little reason to fight the bears back.”
The pound was at $1.3941 as of 4:35 p.m. London time. It dropped to $1.3879 on Wednesday, the lowest since March 2009. Sterling was little changed at 79.11 pence per euro.
Options markets signal that traders are positioning for a further drop in the pound. The premium for options protecting against a decline in the U.K. currency versus the dollar, compared with those insuring against an increase, was 3.77 percentage points, according to six-month risk-reversals. That’s the most since May 2010, when an inconclusive general election led to the formation of the U.K.’s first postwar coalition government.
The pound has weakened against all of its 16 major peers this year. It appreciated against the euro in 2015, a move which hurt some British companies. Rentokil Initial Plc, a London-based business services company, said this week that sterling’s strength versus the euro last year had “negatively impacted” its profit before taxes. Molins Plc, a maker of cigarette-rolling machines and packaging equipment, also reported that the pound’s ascent against the euro last year had “exacerbated” a reduction in demand from the tobacco industry.
Sterling may sink to and even fall below $1.35, a level last seen in 1985, a majority of the economists in a survey by Bloomberg predicted. Some forecast it to immediately drop below $1.20 should the U.K. vote to leave the EU in June.
Declines in the pound “will likely extend a few more days as investors globally reconsider their ‘Brexit’-related trading strategies,” Morgan Stanley currency strategists led by London-based Hans Redeker wrote in a note. “As pound-dollar declines rapidly and markets expect further declines, long-term foreign investors may start to hedge their currency risk, adding to further downward pressure. We remain bearish.”