(Updates prices, adds quote)
By Jemima Kelly
LONDON, Sept 21 Worries and uncertainty over the
impact of Britain's looming exit from the European Union drove
sterling to another five-week trough below $1.30 on
Wednesday as investors awaited the outcome of September's
meeting of the U.S. Federal Reserve.
Since plumbing a three-decade low of $1.2798 in early July,
shortly after Britain's referendum on EU membership, the pound
had rallied more than 5 percent up against the dollar, as
economic data showed the immediate effects of the Brexit vote
were not as dire as had been feared.
But with parliament back after its summer recess, and Brexit
headlines firmly back on newspapers' front pages, concern that
Britain will take a significant economic hit when it formally
leaves the Union have started to weigh.
The Sunday Telegraph reported over the weekend that senior
members of the ruling Conservative Party are supporting a new
group to lobby for a so-called 'hard Brexit' and persuade Prime
Minister Theresa May to leave the EU's lucrative single market.
"People are slowly getting used to the idea that's thrown at
us in every newspaper you can find: that a hard Brexit is
likely," said Societe Generale macro strategist Kit Juckes,
adding that sentiment was helping drive sterling lower this
week, rather than new developments.
"I'm bearish - I think we've probably got about 5 percent
more to go, but it's going to be a a slow and uneven move
lower," he added. "All we're doing now is facing the long-term
debilitating impact on the economy and a long-term period of
Sterling slipped to $1.2946 in early deals in London, its
weakest since Aug. 16. By 1530 GMT it was trading at $1.2970,
0.1 percent lower on the day and over 3 percent off its high
from just over two weeks ago.
Michael Metcalfe, global head of macro strategy with State
Street, said many major asset managers were probably still
sitting on "short" positions in sterling - bets that it will
fall - left over from trading around the Brexit vote.
"Investors (at the time) bought gilts, bought UK stocks and
hedged the currency," he said.
"The question is how long they hold onto that position: it
would benefit sterling if they decided to cash in, but there
does seem to be the view that it will fall further."
The pound could move later in the day when the U.S. Federal
Reserve announces its latest policy decision - though an
interest rate hike this month has been virtually priced out by
markets, some investors are expecting the Fed to flag a rise by
the end of the year.
Against the euro, sterling was also 0.1 percent weaker at
85.860 pence, close to the four-week low of 86.31
pence it hit the previous day.
"We remain broadly bearish on sterling," wrote BNP Paribas
"Short sterling positioning was squeezed considerably over
the past month...as UK data surprised to the upside. Our
short-term fair value model...signalled that this positioning
squeeze had pushed sterling beyond its short-term fair value."
(Additional reporting by Patrick Graham; Editing by Toby