Sterling hit a record low on a trade-weighted basis and hovered just below a record trough against the euro on Tuesday, weighed by a grim outlook for the UK economy in thin trade as the year draws to a close.
Worries about rising UK unemployment, deteriorating public finances and more aggressive rate cuts continued to pressure sterling, while further bad news came as the Land Registry reported a 12.2 percent annual UK house price drop. Parity between the pound and the single currency remained in sight as the euro stayed just shy of the 98 pence peak hit on Monday.
The pound was also weak against the dollar, having fallen earlier in the session to a 6-1/2 year low of $1.4385, according to Reuters data. "Sterling remains on the ropes as we go into the year end," Standard Chartered senior foreign exchange strategist Rob Minikin said.
"FX price action continues to reflect what we have been seeing in terms of weak UK economic data," he said. The sharp falls against the currencies of the UK's main trading partners brought the pouon a trade-weighted basis, its lowest on daily records kept by the Bank of England going back to 1990.
At 1518 GMT, the euro rose 1.4 percent to 97.76 pence, just off a session high of 97.99 pence, according to Reuters data. Against the dollar, the pound dipped 0.1 percent to $1.4495. The euro has soared by over 30 percent against the pound this year, jumping more than 18 percent so far this month alone, and most in the market see it as only a matter of time before the two currencies hit parity.
"People see the opportunity to test parity in these thin trading conditions," State Street foreign exchange strategist Lee Ferridge said. "The deteriorating fiscal situation is becoming a major worry for the UK and this leaves the pound vulnerable," he added.
The International Monetary Fund warned on Monday that countries would need aggressive fiscal stimulus to bolster their economies, but analysts fear high UK government debt levels will limit room for additional measures. Meanwhile, lower UK interest rates compared with the euro zone provided further reason to sell sterling against the euro, analysts said.
The Bank of England has slashed interest rates by 300 basis points since October to 2 percent in an attempt to shore up the economy, leaving them lower than the 2.5 percent in the euro zone, with more cuts expected in the new year. The BoE's aggressive easing has caused yields on UK 10-year government bonds to fall faster than their counterparts in the euro zone, pushing the spread between the two to its narrowest in six years according to Reuters charts.
Comments
Comments are closed.