Weaker stock markets, oil push sterling down

Falls in European and US stock markets along with oil put sterling under pressure on Wednesday, with investors also cautious before the fourth-quarter reading of UK gross domestic product, likely to show annual growth slowing. Gross domestic product data, due on Thursday, is forecast to have expanded 1.9 percent in the fourth quarter, year-on-year, down from 2.1 percent in the previous quarter, a result that could push back interest rate hike expectations even further out. Currently, investors are pricing in a chance of a rate hike in the second half of 2017.
The pound has shed around 6 percent since November, a combination of concerns over the referendum on a British exit from the European Union and fading expectations for higher UK interest rates. Sterling has also tended to be one of those suffering most from the slide in oil and stock markets which has dominated the start of 2016. The country runs a substantial current account deficit, hence the currency tends to come under pressure during times of financial market stress.
"(Investment) risk isn't trading very well, oil isn't trading very well and these are the bigger drivers," said a trader at an international bank. Sterling was down 0.8 percent against both the dollar and euro on Wednesday, trading at $1.4233 and 76.40 pence respectively. The currency had hit a seven-year low of $1.4080 last week and a one-year trough of 77.56 pence last Wednesday.
"Its been a perfect storm for sterling so far this year, really, but in recent days it has begun to look like it is bottoming out," said Lee Hardman, currency economist with Bank of Tokyo-Mitsubishi UFJ in London. "The risk is still that we go towards the 2008 lows around $1.35. That would probably need the polls to show a rise in support for Brexit (EU exit), or global equity markets to continue to sell off strongly."
Before the UK GDP reading on Thursday, all eyes will be on Wednesday's post-meeting statement by the US Federal Reserve on the outlook for interest rates and the economy. Most bank analysts say it is too early for the Fed to give a strong signal on the timing of its next move, having raised rates in December, but its rhetoric on this month's market ructions will be watched closely. The Bank of Japan also meets on Friday, under some pressure to add to its own efforts to prop up growth.