Sterling fell to a two-week low against the euro on Thursday, 3,000 job cuts at British bank Lloyds adding to signs of a worsening economic outlook as investors bet the Bank of England will cut interest rates next week. Since the 14 percent fall in the pound in the hours after the vote to leave the European Union on June 23, sterling has proved more robust than many major banks' forecasts. Derivatives market indications of its future value are now far more balanced.
But the mood remains glum. "There is this general pessimism that will hover over Great Britain and the pound for the foreseeable future," said Davis Hall, global head of FX and precious metals at Indosuez Wealth Management in Geneva. "Lloyds is the first of many negative announcements. You are going to have more and more relocations. So if the pound got back to $1.33, $1.34 I would be trying to put on trades that were short sterling through the options market."
By late afternoon in London, sterling had lost 0.9 percent to 84.41 pence per euro. Alone among the major currencies, it was also more than half a percent lower against the dollar at $1.3130. Almost all of the analysts polled by Reuters ahead of next week's Bank of England meeting believe that the bank will cut rates by a quarter point from the current record low of 0.5 percent.
But that cut has been widely expected since the Brexit vote, meaning the bank may have to deliver more to damage sterling further. On that front, former BoE policymaker David Blanchflower was the latest voice to suggest the Bank may cut rates into negative territory in an article in the Guardian newspaper on Thursday. British banks have already begun to tell savers that they may start charging them for depositing cash.
Interbank money markets, however, have yet to price in a cut in official rates into negative territory, conscious of past warnings from the bank that such rates might be counterproductive given the structure of UK banking. "Blanchflower's comments nonetheless highlight that if we see very soft data over the next few months, then the market could start to price negative rates as a tail risk," analysts from BNP Paribas said in a morning note. "Our economists think the BoE will cut by 25bp next week and announce GBP 50bn of asset purchases."
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