July 17, 2020 / 11:18 AM / 25 days ago

UPDATE 2-Economic gloom sees sterling set for biggest weekly loss versus euro since May

* Graphic: World FX rates in 2020 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv (Updates throughout, adds chart)

By Elizabeth Howcroft

LONDON, July 17 - The pound fell against the dollar and euro on Friday and was set for its biggest weekly loss to the euro since the second week of May, weighed down by Britain’s bleak economic outlook, Brexit uncertainties and the possibility of negative interest rates.

Prime Minister Boris Johnson eased some lockdown measures on Friday, but also announced local authorities will have power to shut down smaller areas of the country if necessary.

The pound did not strengthen on the news of fewer restrictions and remains the worst-performing G10 currency this week, down 0.8% against the dollar.

At 1435 GMT, the pound was 0.3% lower against the dollar at $1.2521.

Against a stronger euro, it was down around 0.7% at 91.310 pence per euro. The pound was also on track for a 2% fall against the euro - its biggest loss since the week beginning May 11.

“Sterling does well on the big risk-on days, rallies back, and then as soon as it’s not a day where there’s significant risk appetite in the market, it shows its true colours a little bit more,” Kit Juckes, head of FX strategy at Societe Generale, said.

“There is concern about the UK economy, there is concern that the MPC (monetary policy committee) might end up easing further in the market,” he said.

This week saw British gross domestic product data for May rise less than expected, prompting investors to doubt the fiscal stimulus measures already announced will be enough to prop up the economy.

Fewer British workers lost their jobs in June, official data on Thursday showed, but economists said unemployment was still expected to jump as the government unwinds its expensive job retention scheme.

Bank of England Governor Andrew Bailey on Friday said there were signs of activity returning “quite strongly” in the housing market and in new car sales, but not in hospitality and entertainment.

MUFG strategist Derek Halpenny wrote that Britain faced a “possible extreme period of dire sentiment” as the government plans to phase out its expensive job retention programme and investors fear it will manage only a poor trade deal with the European Union.

Asked about negative interest rates on Wednesday, Bank of England policymaker Silvana Tenreyro said evidence from the euro zone and other countries had been largely positive

In Europe, investors are focused on an EU summit on Friday and Saturday where leaders will discuss a proposed 750 billion- euro EU-wide coronavirus recovery fund.

Brexit negotiations will resume next week.

Reporting by Elizabeth Howcroft; editing by Larry King and Barbara Lewis

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