Europe Markets

Sterling hits lowest level since April 2017 as disorderly Brexit fears grow

Key Points
  • Sterling has extended losses as fears grow that the next U.K. prime minister will accept a no-deal Brexit.
  • Versus the dollar it dipped to $1.2418 on Tuesday, its lowest level since Apr 11, 2017.
  • The pound also weakened to a six-month low versus the euro.
Contenders to be the U.K.'s next leader, Boris Johnson and Jeremy Hunt (R), take part in the debate "Head To Head" on ITV on July 9, 2019 in Salford, England.
Handout | Getty Images News | Getty Images

The pound plunged to new lows Tuesday after lackluster U.K. data compounded growing fears of a haphazard Brexit outcome at the end of October.

Sterling versus the U.S. dollar weakened 0.7% Tuesday, reaching $1.2418 by late-morning London trade. It hit a 27-month low against the greenback and a new six-month low versus the euro. Against the single currency, the pound has also suffered 10 consecutive weeks of losses — the longest on record.

In a research note Tuesday, Nomura's currency analyst Jordan Rochester called the fall in the pound's spot price as "the story of the day" and said there was potentially more downside risk.

"I am worried that volume is starting from a very low base and hedging flows will be picking up further," he said. Rochester said in a separate text on Monday that he expected a spike in volatility for the pound's trade once lawmakers returned to the House of Commons in September after their summer breaks.

According to Reuters data the British pound has been the worst performing G-10 currency this year. Sterling's recent trend of losses against its major trading partners has been attributed to the ongoing race to succeed Theresa May as the next Conservative Party leader and U.K. prime minister.

Previous London Mayor and former Foreign Secretary Boris Johnson is the favorite to defeat current Foreign Secretary Jeremy Hunt in the runoff.

In their pitches to Conservative Party members, both men have taken a hard-line stance on future negotiations with the European Union, suggesting that they are prepared to walk away without a deal on October 31.

In a television debate Monday, each declared that the Northern Ireland "backstop" was "dead," as it could trap the U.K. into a never-ending customs union with the EU.

The backstop was agreed by May's team with Brussels as a means to ensure that there was no physical border erected on the island of Ireland between Northern Ireland (which is a part of the U.K.) and the Republic of Ireland (a separate country that is to remain as a European Union member nation).

Difficult to see if Boris Johnson can deliver the Brexit he wants: Academic

Mixed labor data

New economic data also affected trade in the pound on Tuesday morning. Employment figures gave mixed messages on the health of the U.K. labor market, with both jobless claims and wages rising.

British wages rose at their fastest pace in 11 years, according to official data, and the unemployment rate over a three-month period held at its lowest level in 44 years.

However, growth in the number of people employed in the United Kingdom slowed with the quarterly increase of 28,000 marking the weakest rise since the June to August period of last year.

In a note Monday, researchers at Swiss bank UBS claimed recent sterling weakness was "overdone," suggesting markets had overpriced sluggish U.K. data as well as the no-deal Brexit risk for October.

The bank's forecast for sterling-dollar over three months has been lowered to $1.29 and 0.87 pence versus the euro.