"Bad news everywhere": Sterling stands near bottom in two years

LONDON (Reuters) – Britain's economic sluggishness and the impending Brexit deadline have kept the British pound close to its trough on Wednesday, as diplomatic talks with the United States and China shed light on troubled ties country with other trading and political partners.

The outlook for the British currency has deteriorated sharply in the last two weeks, with a record 10-week loss against the euro. Against the dollar, it is at its lowest since April 2017, with the exception of a "flash crash" in January.

"It seems like the pound is getting bad news everywhere," said Adam Cole, chief foreign exchange strategist at RBC Capital Markets in London.

"The pound sterling is characterized by extreme risks" in both directions, but at the moment, the downside risks dominate. "

A dismal body of data and the risk of collapse of the European Union without the agreement of a transitional trade agreement forced the Bank of England to change its optimistic badessment of the # 39; s economy. His then hawkish stance, in contrast to other central banks of developed countries, had been an essential source of support for the pound sterling this year.

That was, however, canceled last week when Governor Mark Carney suggested the bank join its counterparts to cut interest rates.

Adding to its problems, Britain found itself embroiled in a diplomatic dispute with the United States, following the publication by UK Ambbadador Kim Darroch of memos concerning the United States. Trump administration.

The news of Darroch's resignation on Wednesday had no impact on the pound.

Britain has also recently silenced China following pro-democracy protests in Hong Kong, prompting Beijing to accuse London of a "colonial" state of mind. Hong Kong was once a British colony.

Against the dollar GBP = D3, the pound sterling rose slightly by 0.3% to 1.2497 dollar, just at the low of Tuesday, to 1.2439 dollar. Against the euro EURGBP = D3, it fell 0.1% to 89.99 pence.

And on a trade-weighted basis, the currency has fallen to its lowest level this year, according to data from the Bank of England, GBPTWI = BOEL

(For a chart on "Pound set for record streak vs. euro", click here tmsnrt.rs/2YU4Xxq)

(For a trade-weighted pound chart, click here tmsnrt.rs/2G5B8Tr)

ECONOMY AND POLITICS

On the Brexit front, Boris Johnson, the absolute favorite of July 23 to replace Theresa May as Prime Minister, has promised to eliminate Britain from the EU by October 31st. , with or without transition agreement.

Johnson has not ruled out suspending or "proroguing" the parliament to prevent it from blocking a messy Brexit.

"The risk of a Brexit without agreement increased when it became apparent that Johnson would be the next PM, and nothing that Johnson said has reduced that risk," Cole said.

Uncertainty surrounding Brexit has kept the economy under pressure, with recent data such as retail sales surveys and purchasing managers suggesting a contraction in the second quarter.

The UK's composite PMI index is in contraction for the first time since mid-2016, as indicated by data released last week, a sign that the services sector, until then flourishing, also slows down.

While Wednesday's data showed faster-than-expected growth of 0.3% in May, it did nothing to counter the sluggishness.

"Yesterday we witnessed concerns and honestly, the trigger was a minor publication on retail sales. If such a minor thing can trigger such a sharp depreciation, it shows that there are several reasons for the weakness of the pound sterling, "said Esther Reichelt, exchange strategist at Commerzbank in Frankfurt.

"A new Prime Minister coming up, no solution available or apparent for the Brexit, as well as growth concerns and the market taking more and more into account than the rate cuts of the Bank of England – of course , all these factors weigh on the pound sterling. "

The recent data campaign, followed by an apparent change in the BOE position reported by Carney, led the markets to focus on rate cuts, aligning the BOE with other central banks around the world.

All of these fears finally seem to fit into hitherto calm option markets, with implied volatility of three months, a gauge of expected currency fluctuations, at a two-week high GBP3MO = FN.

The implied six-month volatility – including the Brexit deadline – shows a premium of about 3 on the 3-month option contract, the highest level since May 2016.