Sterling fell for a third consecutive day on Tuesday as investors took profits on a recent bounce and worried about the weakening performance of the British economy. The British pound climbed nearly 7 percent to a 15-month high above $1.3650 earlier this month as expectations rose of a November rate increase by the Bank of England.
But it has retreated nearly 2 percent over the last week as investors have taken profits, even as various positioning indicators showed a broad-based pull back in short sterling bets. "Markets have priced in too much of central bank rate increases over the coming months, as much as one rate hike for every two quarters, and that is at odds with the underlying state of the economy," said Sam Lynton-Brown, an FX Strategist at BNP Paribas in London.
For example, ratings agency Moody's downgraded Britain's credit rating on Friday, saying the government's plans to bring down its heavy debt load had been knocked off course and Brexit would weigh on the economy. Sterling was trading at $1.3429, its lowest since September 15. Yields on one to 10-year benchmark debt are up by 5-10 basis points since the Bank of England signalled earlier this month it might raise interest rates at a November policy review.
An FX positioning tracker by BNP Paribas combining signals from the derivatives markets and investor positioning showed net long sterling bets at their biggest since October 2015. Sterling held firm against the euro as worries over a period of political uncertainty in Germany following elections on Sunday continued to drag the single currency lower.
Fears that German Chancellor Angela Merkel could find it difficult to strike a coalition deal with parties that are radically different from her own have weighed on the euro since Sunday's results, with the single currency recording its worst day this year against the dollar on Monday. The pound strengthened to 87.645 pence per euro, up 0.4 percent on the day. On a trade-weighted basis, sterling was trading at 78.5, just shy of a four-month high it hit last week.