Sterling sank more than 1 percent against the dollar on Tuesday, hit by worries that deadly attacks in Brussels would boost the campaign to take Britain out of the European Union. Bookmakers' odds on Britain choosing to leave the EU in a June 23 referendum had already tightened after the resignation of a senior pro-"Brexit" minister and criticism of finance minister George Osborne and his 2016/17 budget.
Factoring in the Brussels attacks that killed 34 people on Tuesday, betting website Betfair narrowed its odds on a British vote to leave the EU to 36 percent, up from 33 percent. Others showed odds of 6-4, or 40 percent. Sterling fell to a six-day low of $1.4191. It also weakened by around 1 percent against the euro, to 79.05 pence. "Things were not shaping up well for sterling at all yesterday because of the political tension in the Conservative Party over the weekend," said Stephen Gallo, European Head of FX Strategy at Canadian bank BMO in London.
"The attacks in Brussels certainly will not help. Terrorism is one of the things that we have said might flip the polls either way." Some advocates of a Brexit claimed the EU's open border policy had allowed the attacks on Brussels' main airport and a rush-hour metro train to take place.
A warning from ratings agency Moody's on the outlook for the country's public finances added to concerns about last week's budget, attacked over the weekend by members of the ruling Conservatives for its "unfair" cuts to welfare. Official data on Tuesday also showed Osborne was on the verge of missing his target for cutting the budget deficit in the current financial year. Consumer inflation numbers offered the pound no support, coming in slightly below forecast and still close to zero in both annual and monthly terms.
The pound has, nevertheless, recovered since slumping to $1.38 after the June 23 referendum date was announced last month. But while a big speculative push against the currency has so far failed to materialise, bankers say the issue is being much discussed both by corporate and fund investors. They worry that leaving the EU would hit growth and threaten the huge foreign investment flows that Britain needs to fund its current account deficit, one of the biggest in the developed world at about 4 percent of national output. A poll last week showing the "Out" campaign inching in front also led to a sharp dip in the pound, while options contracts allowing investors to hedge against sharp moves in the pound are back near levels seen in the run-up to last year's national election.
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