Sterling steadied on Thursday after falling to its weakest on a trade-weighted basis in two years, helped by investors squaring positions before the long Easter weekend and a marginally more optimistic reading of British retail sales. Ructions within the ruling Conservative Party and the reaction to Tuesday's bomb attacks in Brussels have driven an almost 2 percent fall in sterling in trade-weighted terms this week as bookmakers' odds on a "Brexit" narrowed.
The cost of hedging against sharp swings in the currency in the run up to the June vote on European Union membership also rose to more than 15 percent, its highest since a closely fought parliamentary election in 2010. But after those initial blows, spot rates for the pound made a minimal recovery, leaving it flat on the day at $1.4129 and 0.4 percent higher at 78.87 pence per euro.
BNP Paribas strategist Sam Lynton-Brown said that looked chiefly the result of the retail sales numbers and very negative positioning on sterling which means investors are more easily tempted to close out bets on the pound. "We think the market is very excessively bearishly positioned on the pound," he said. "The result is that even when something like this morning's data is very minimally positive, you can get an exaggerated feed through onto the currency."
A above-forecast 3.8 percent annual rise in retail sales showed British consumers were still driving the recovery despite a gloomier outlook for the economy and the approach of the referendum. A telephone poll published around midday also showed a solid lead for the campaign for Britain to remain in the EU, in contrast to some other polls this week which have shown the vote as too close to call. But the general message this week has been that any perceived rise in the chances of an 'Out' vote will hurt sterling.
"A sizeable chunk of the move this week is related to Brexit," said Tobias Davis, Head of Corporate Treasury Sales with Western Union in London. "You can see it in the three-month implied volatility, which has surpassed levels seen ahead of the Scottish vote on independence. There is dollar strength in the mix, of course, as well as some position-squaring ahead of the Easter weekend."
Analysts from Goldman Sachs laid out economic modelling in a note to clients that pointed to a fall for sterling to $1.37 as the June 23 referendum approaches. "Until the referendum takes place in June, we view the risk to our estimates of a weaker pound as standing to the downside," they said. "Although we would note that the market is already starting from a net short position, whereas short cable became a more popular trade only around 10 days before the Scottish referendum in September 2014."
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