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UPDATE 2-Sterling has worst week in a year as political worries grow

Fri, 6th Oct 2017 16:08

(Adds new comments and updates with May's speech and labour data)

By Fanny Potkin

LONDON, Oct 6 (Reuters) - Britain's pound fell to four-weeks lows on Friday, amid growing uncertainty over Prime Minister Theresa May's control of the leadership and strong U.S labour market data that boosted the dollar.

Sterling was on track for its worst week in a year against the dollar and on a trade-weighted basis, after a more than 2 percent fall.

Prime Minister May said on Friday she would stay on as leader to provide stability after a former chairman of her Conservative Party said he had the support of 30 lawmakers who wanted her to quit.

May's assurances gave sterling a brief lift - it briefly topped $1.31 after her statement - but they were not enough to assuage worries over divisions in the Conservative government.

"What's weighing on sterling is primarily political developments. The market is pricing in a growing risk of an early election or a leadership change and the possibility of a leader with a hard Brexit agenda," said Adam Cole, chief currency strategist at RBC.

Data last week showed speculators had turned positive on sterling for the first time in almost two years in the week up to last Tuesday. The gains were driven by expectations the Bank of England would raise interest rates and optimism around Brexit negotiations.

But numbers due later on Friday are likely to show a reversal of those long positions. The political uncertainty and worries over the health of Britain's economy have helped knock more than 3.5 percent off the pound's value over the past two weeks

"You are having this news developing at a time when people have been squeezed out of their short-term sterling positions in September. It magnifies the effect because people don’t have the short-sterling position because they were squeezed out,” said Altana currency fund manager Ian Gunner.


Gunner noted that the Bank of England still appeared to be on track for an interest rate hike in November, which had lifted the pound in September, and that would be likely to continue to support the pound.

"As we get closer to November and the inflation reports, it may be another reason why it might be difficult to retain big short positions on sterling," he said. "So it’s a matter of time before this move will eventually peter out."

By 1440 GMT, sterling was trading down half a percent on the day at $1.3052. It had touched a low of $1.3027 earlier as strong U.S. wages and unemployment data boosted the dollar.

Against the euro, sterling slipped 0.6 percent to a three-week low of 89.86 pence.

Adding to sterling’s woes have been weak economic data releases pointing to tepid growth in Britain’s economy.

Figures on Friday showed British economic productivity fell at its joint-fastest annual rate since 2013 in the 12 months after the country voted to leave the European Union.

(Reporting by Jemima Kelly and Fanny Potkin, editing by Larry King)

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