Sterling Slides Towards Post-Referendum Low

The sell-off in the pound gathered momentum overnight with the exchange rate against the euro falling to a new 22-month low while the GBP/USD market tumbled to levels not seen since March 2017.

After a relatively sanguine period FX Traders now seem to be waking up to the very real possibility of a no-deal Brexit and there’s a sense of fear creeping back into the market. The post referendum lows against both the dollar and the euro are now just a couple of percent away and any further adverse developments could see these broken in the not too distant future with the pound set for its worst month since October 2016.

The bulk of the depreciation in the pound seen recently can be attributed to concerns regarding Brexit, with the UK set to pursue a risky game of brinkmanship in pushing for a better deal. The next couple of days may see the market’s attention shift away from solely focusing on the political developments with the Federal Reserve and the Bank of England both set to announce their latest policy decisions by Thursday lunchtime.

Even though the Fed is expected to deliver its first rate cut in over a decade and the BoE is almost certain to keep policy unchanged, the balance of risks is tilted to a USD positive and a GBP negative outcome.

This is due to the markets already discounting a 25 basis point cut from the Fed, meaning that Chair Powell and his fellow rate setters have a pretty high bar to clear to deliver a dovish message. On the contrary, the market path for rates in the UK has been unjustifiably high for much of the past year, with investors until recently of the belief that a hike was more likely than a cut in 2019.

In light of the latest twists and turns in the Brexit saga, it now appears far more likely that the BoE eases policy once more in the coming months and any hints or suggestions towards this on Thursday could heap more pressure on the beleaguered pound at a time when it is looking increasingly fragile.