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Why is the Sterling declining against the US dollar and the euro and what's the near-term outlook?


John Naronha

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The GBPUSD pair fell to its lowest price since the flash crash on 3rd January this year amid rising fears that Britain would exit the European Union without a deal. In addition, the country’s worsening economic outlook and a rebound in the US dollar are pushing Britain's currency to within striking distance of the April 2017 lows of $1.2409, although the sterling briefly fell to 1.2373 during the flash crash on 3rd January this year. The pound was also weak against Europe’s single currency, slipping to 0.8988, the lowest since 11th January and is on target for the tenth straight weekly loss.

Analysts are of the view that the sterling has already priced in a no-deal Brexit with a 95% chance that the Eurosceptic Boris Johnson would head the Conservative Party to become the next Prime Minister and lead Britain towards a no-deal Brexit. The fear is reflected in the currency derivative markets where the spread between the three and six-month implied volatility on sterling has widened to the highest in two months while the open interest on options contracts is also pointing to a weaker UK currency.

UK’s economic growth data for May is due to be announced on Wednesday. Analysts expect the economy to have expanded by 0.3% from -0.4% in April. If the economic growth figures come in line or better than analysts’ expectations, the sterling could see a pullback to $1.2650. If, on the other hand, the data points to another slowdown, sterling could come in for some fresh selling.

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