Sterling recovers from two-month lows but worries linger

Sterling bounced slightly after hitting a near-two-month low against the dollar on Thursday but strategists said the outlook was still clouded by concerns about Brexit risk and economic fundamentals. Data showed revised quarterly growth of 0.3 percent in the June quarter, while household spending remained weak. Sterling edged back up to $1.2802 after falling to $1.2774 in early trades, its weakest since June 27.
On a monthly basis, the pound has fallen nearly 3 percent so far this month and is set for its biggest monthly decline since October. "Sterling has been impacted by a general decline in risk appetite while structurally, business sentiment and investment plans have been hit by the ongoing political uncertainty, with the services sector being hit the hardest," said Peter Chatwell, head of euro rates strategy at Mizuho International Plc. Naeem Aslam, chief markets strategist at Think Markets UK, said the modest 0.1 percent increase in household spending was a concern as it reflected broader worries about wage growth.
Against the euro, sterling stabilised near a 10-1/2 month low of 92.37 pence hit on Wednesday. Apart from that level, reached during a short-lived overnight "flash crash" in October, that was its weakest in eight years. The government is striving to move forward formal discussions on leaving the European Union, with a series of position papers that have outlined potential compromises over key issues.
On Wednesday it outlined several escape routes from the "direct jurisdiction" of the European Court of Justice after Brexit, one of Prime Minister Theresa May's key aims in talks to unstitch 40 years of EU membership. Morgan Stanley strategists said the British economy may lose growth momentum as the government's failure to define its Brexit target creates investment uncertainty.
On a trade-weighted basis, sterling was trading at its lowest level since November 2016. "We have been quite bearish about the British pound for some time and I think this trend is justified given its worsening fundamentals such as a widening current account deficit," said Thu Lan Nguyen, a FX strategist at Commerzbank AG in Frankfurt. Broad currency market moves were limited as an annual central banking conference gets under way in Jackson Hole, Wyoming, with markets focused on appearances by Fed Chair Janet Yellen and ECB President Mario Draghi on Friday.