Sterling skidded to its weakest in more than two years against the euro on Thursday after the head of the Bank of England said more stimulus would probably be needed in Britain over the summer after last week's shock vote to leave the European Union. Governor Mark Carney, who had previously warned of a possible recession in Britain if it chose to leave the EU, said the central bank's Monetary Policy Committee would announce an initial assessment of the situation on July 14, after its next scheduled meeting.
The pound weakened by more than 1 percent on the day to 83.845 pence per euro, its weakest since March 2014, after the publication of Carney's comments. Sterling also fell to as low as $1.3245, from around $1.3432 beforehand. That left it more than 1 percent down on the day and just over 1 US cent away from a 31-year low hit on Monday.
"(Carney) clearly signalled that the Bank of England is ready to ease monetary policy, most likely at the August meeting," said Bank of Tokyo-Mitsubishi UFJ currency strategist Lee Hardman. "I don't think the comments were that much of a surprise, but it's obviously triggered quite a move in the market, which highlights how vulnerable the pound is right now."
The pound had slid almost 8 percent last Friday, the steepest daily decline in the post-1973 floating-exchange-rate era, after the result of Britain's EU referendum stunned markets. Those losses continued into Monday, with sterling shedding another 3 percent and markets firmly in risk-off mode. As risk appetite recovered a little, so did sterling, gaining more than 1.5 percent on Tuesday and Wednesday against the dollar. But most of those gains were wiped away on Thursday as investors bet that interest rates would be cut further from their current record lows in the months to come.
Earlier sterling had risen as high as $1.3494 after former London mayor Boris Johnson's surprise announcement that, contrary to widespread expectations, he would not be running for prime minister following David Cameron's decision to resign. Sterling then eased back, even before Carney's comments. "It had a little bit of a bounce based on the view that he (Boris), being the figurehead of the 'Leave' campaign, would have found it difficult to negotiate a deal with Europe," said Societe Generale currency strategist Alvin Tan. "But really it wasn't a lasting bounce at all.
Data showing that Britain's large current account deficit had failed to narrow as expected in the first three months of this year and remained close to an all-time high had little impact on the currency. Analysts said that because sterling's slide was largely driven by projections for the likely impact on the economy of Brexit, backward-looking data such as this was less important. Other figures showed the economy grew by 0.4 percent in the first three months of 2016, in line with forecasts, and was 2.0 percent larger than a year earlier.
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