Sterling still weak, but gets some help from stronger risk appetite

Sterling climbed from its lowest in more than two years against a basket of currencies on Friday as risk appetite improved, giving the Brexit-rattled currency some respite at the end of a fourth straight week of losses. The pound has largely been driven since the end of last year by worries that Britain will vote to leave the European Union in a referendum on June 23. Any sign that a Brexit is becoming more likely cause it to fall.
With investors focused on domestic political and global market risks, British economic data have moved into the background in recent months. Friday's data releases were no different. They showed industrial output slid at the fastest rate in more than three years in the three months to February and the trade deficit ballooned to 12 billion pounds, its widest in eight years. But sterling climbed 0.4 percent to $1.4117 .
Against the Bank of England's trade-weighted basket of currencies, the pound inched up to 83.4 from Tuesday's low of 83.3. It was 0.1 percent stronger against the euro at 80.815 pence. "Sterling is being treated as the ultimate risk asset right now," said UBS Wealth Management strategist Geoffrey Yu. "We've had a week where risk has been beaten down, and I think the market just wants to take a breather on that right now, so sterling has benefited."
But even with risk appetite growing, Yu said, sterling was unlikely to gain as much as other risk assets. Uncertainty over the referendum was too high to justify a play on the pound. Opinion polls show the "In" and "Out" camps virtually tied before June's ballot. Bookmakers are still give Brexit a one-in-three chance. "A 12 billion-pound trade gap comes at a pretty horrible time given all the Brexit worries. It is a timely reminder of how vulnerable Britain is, especially since it runs one of the largest current account deficits," said John Hardy, currency strategist at Saxo Bank.
The cost of hedging against big declines in sterling before the referendum soared this week to a six-year high against the dollar and a seven-year high against the euro. FX risk management specialists HiFX said sterling could be vulnerable to a "huge liquidity crunch" before the vote. "Sterling is going to be illiquid and choppy in either direction depending on the result," HiFX Chief Economist Chris Towner. "Why risk unnecessary losses when you can do something about it now and hedge forward.