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Pound rises from 2-year low as Brexit nerves ease

epa05175546 British Pounds in London, Britain, 22 February 2016. Sterling suffered its worst fall in over a year over fears that Britain might decide to leave the EU.  EPA/ANDY RAIN

London / Reuters

Sterling climbed on Tuesday as European investors returned to work from the Easter break, up around 0.6 percent on a trade-weighted basis since the market close last Thursday, as nerves over a possible British exit from the EU quietened somewhat.
The pound had hit a two-year low last week against the Bank of England’s trade-weighted basket of currencies, having been driven down in recent months by increasing anxiety over a June 23 referendum on whether Britain should stay in the European Union.
Ructions within the ruling Conservative party and bomb attacks in Brussels last week had seen the chances of a Brexit implied by bookmakers’ odds rise around 3 percentage points to 36 percent, and that sent sterling down almost 2% over the course of the week.
But by Tuesday most bookies had widened their odds again, with betting website Betfair showing the implied probability of a Brexit back down around 33 percent. Two polls since Thursday have shown a substantial lead for the ‘In’ campaign, with the latest showing it with an 8 percentage point lead over those pushing for an exit from the bloc.
Sterling was up 0.3 percent from Monday’s U.S. close to trade at $1.4293, leaving it over 1 percent up since Thursday. Against the euro it was around a quarter of a percent higher at 78.38 pence, up about 0.75 percent since Thursday.
“We use bookmakers’ odds … as a kind of guide to what the market is thinking,” said HSBC currency strategist Dominic Bunning. “The Brexit story … has clearly been the main focus for sterling.”
Britain’s hefty current account deficit makes it vulnerable to any pull-back in the huge investment flows it relies on, which are threatened by a possible Brexit and which fall when investors’ appetite for risk decreases.
Sterling has also been undermined by expectations that any resulting hit to economic growth would push back the horizon for a Bank of England interest rate rise.
The BoE said on Tuesday that risks around the referendum could push up borrowing costs and weaken sterling.
The cost of hedging against sharp swings in the currency in the run-up to the referendum last week rose to a six-year high of 15.25 percent. On Tuesday, it stayed close to that at 15.15 %.
With little major UK data to be published in the coming days, strategists said the main focus would be on the United States, where the head of the Federal Reserve will be closely watched later in the day for clues on interest rate rises.
“Sterling sentiment is bad enough that it needs a steady flow of bad news to sustain it and I can’t really see much on the horizon today or this week,” wrote Societe Generale analyst Kit Juckes.

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