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Pound pressured by worries over Brexit "tail risks"
February 28, 2017 / 10:19 AM / 9 months ago

Pound pressured by worries over Brexit "tail risks"

* Graphic: sterling and gilt yields

* Graphic: World FX rates in 2017

* Graphic: Trade-weighted sterling since Brexit vote

By Jemima Kelly

LONDON, Feb 28 (Reuters) - Sterling traded close to a two-week low against the dollar on Tuesday as investors awaited a speech by U.S. President Donald Trump, with the pound kept under pressure by worries about the future of Britain as it leaves the European Union (EU).

The pound fell to as low as $1.2384 on Monday, its weakest in a fortnight, on reports that Scottish nationalists were preparing to demand a fresh independence referendum, possibly as early as March, to coincide with the government’s plan to formally trigger Britain’s exit from the EU.

It stayed close to that level on Tuesday, down 0.2 percent on the day at $1.2420.

Scottish First Minister Nicola Sturgeon said in a newspaper article on Tuesday that the “sheer intransigence” of the British government over Brexit could lead to a second referendum.

A British government spokesperson had said on Monday there should not be another vote, and that the mere threat of one was creating unnecessary uncertainty and division.

ING currency strategist Viraj Patel described a possible second independence referendum as one of a number of Brexit “tail risks”. But he said negotiations over Britain’s exit from the bloc - and not a possible Scottish exit - would be the key driver of the pound in the months to come.

“Our economists just don’t see Westminster accepting a second referendum at least in the next 6 to 12 months,” he said. “They don’t want to be battling on two fronts.”

BNY Mellon strategists, however, wrote in a research note to clients that it was surprising that sterling had not reacted more to news about Scotland, and that talk of a second referendum could start to become more important for markets.

“Sterling’s largely indifferent reaction so far to the flow of news on the possibility of a Scottish referendum follows the pattern seen in the run up to the 2014 referendum,” they wrote.

“However, it is also clear that since June 23, political sensitivity has returned as a driving force for sterling... The risk Scotland’s first minister will call for a second referendum in the aftermath of the triggering of Article 50 could start to weigh rather more heavily on sterling in the weeks ahead.”

New Bank of England Deputy Governor Charlotte Hogg said on Tuesday that her tolerance for above-target inflation would depend on events, and that she would be willing to stand up to Governor Mark Carney if she did not agree with him.

Sterling showed little reaction to the comments, edging down 0.1 percent on the day against the euro to 85.25 pence .

Surveys showed earlier on Tuesday that British consumer morale sunk lower in February as rising inflation following last year’s Brexit vote made householders warier about the outlook for their finances. (Editing by Ed Osmond)

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