Sterling fell on Wednesday after two days of strong gains, as attention shifted away from the political picture in Britain and towards the prospect that the Bank of England could cut interest rates on Thursday. Sterling had rebounded sharply in the previous two days, having hit a 31-year low last week, as the news that British interior minister Theresa May would become prime minister eased some of the uncertainty that has dogged the currency since Britain voted to leave the European Union on June 23.
But on Wednesday it fell 0.7 percent to 84.145 pence per euro. Against the dollar, sterling slipped 0.3 percent to $1.3212. The Bank of England started a two-day meeting on monetary policy on Wednesday, and Governor Mark Carney has hinted he may ease policy to cushion the economy from the shock of Britain's vote for Brexit, which the Bank reckons will drive a slowdown.
Markets are pricing in a more than 70 percent of a 25-basis-point rate cut on Thursday. "Sterling is leading the way again in the FX market - attention is turning towards tomorrows BoE headlines," said Mizuho's head of hedge fund FX sales, Neil Jones. "I sense some participants are selling sterling in expectation for a return to the downside. Recent political stability has generated a wave of sterling buying but it appears this may be factored into the markets. FX focus is shifting away from political to monetary policy," Jones added.
Traders will also keep an eye on who the new prime minister will appoint as finance minister, with many also waiting for clarity on her thinking on triggering Article 50, the procedure for exiting the European Union. May has said "Brexit means Brexit", but also that Britain will not rush to trigger the formal divorce proceedings. The uncertainty over whether Britain will be able to retain access to the single market after exiting the EU, is likely to make traders wary of sterling.
"It remains unclear for the time being as to whether the UK will retain free access to the single market, and therefore the potential for setbacks in sterling is high," said Thu Lan Nguyen, currency strategist at Commerzbank. "After all, the massive current account deficit causes considerable concern against the background of continued uncertainty." Britain runs a current account deficit of around 7 percent of gross domestic product - amongst the highest in the developed world. That makes the pound vulnerable to changes in foreign capital flows needed to plug the gap. Officials from the world's largest asset manager, BlackRock, said on Tuesday Britain would fall into recession over the coming year and growth in each of the next five years would be at least 0.5 percentage points lower as a result of Brexit.
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