Sterling fell back against a broadly stronger euro on Monday, halting three weeks of consistent gains against the single currency as markets awaited the British government’s autumn budget statement on Wednesday.
Against the dollar, the pound was a touch lower than the previous close, just above two-week lows hit during the day on Friday but more than a cent above the $1.21-22 handle it traded at for most of October.
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The steadier tone for sterling has come as a number of banks begin to argue that a 20 percent fall since last December may prove enough to account for Britain’s large external deficit and much of the risk stemming from June’s Brexit vote.
Barclays strategist Hamish Pepper argued that extremely extended positioning against the pound suggested the risks from Wednesday’s budget statement were weighted in its favour. “The risk for us is that the government are able to forecast a continued narrowing of the deficit,” he said. “The consensus forecast is for a very modest recovery. If you get something a bit more aggressive than that, then it may give sterling a boost.
“I think sterling is just tracking the broader moves in the euro this morning. The big event is Wednesday and the autumn statement and I don’t think people will be overly keen to put a lot of risk on ahead of that.” The pound traded around 0.7 percent weaker at 86.30 pence per euro, compared with Friday’s two-month high of 85.26 pence. Against the dollar, it was 0.2 percent weaker at $1.2317.
Chancellor Philip Hammond on Sunday played down the chances of any kind of major new boost for spending from Wednesday’s statement, his first as finance minister since the rejigging of the Conservative government after June’s referendum. Hammond said in a BBC interview he wanted to keep some fiscal “head-room” as two years of difficult negotiations about leaving the European Union approach.
Analysts expect some modest infastructure spending and housing stimulus from Wednesday’s statement but nothing that would radically change expectations of a weaker economy next year when difficult talks begin on the terms of Brexit. “Public finances are not in good shape and Mr Hammond has no appetite for a major increase in borrowing,” said Societe Generale strategist Kit Juckes.
“That, along with (German finance minister) Wolfgang Schaeuble’s hard line on Brexit negotiations, won’t help the pound which has seen some reduction in short positions according to last week’s CFTC data. A brief sortie by the euro back up to 0.88 is possible.”