LONDON (Reuters) - Sterling fell back broadly on Tuesday, handing back much of three days of solid gains against the euro as media reports refocused traders’ attention on the political risks associated with Britain’s departure from the European Union.
The immediate trigger for the losses was a leaked memo suggesting that Britain has no overall plan for Brexit and may take six months to agree one due to divisions in Prime Minister Theresa May’s government.
May’s office said it did not recognise the claims made in the document. But the report chimed with the worries expressed by many institutional investors that there is no clear plan to avoid an economically damaging outcome to the Brexit process.
“The U.S. investment community got very excited about negative European politics in the last few days,” said Richard Benson, co-head of portfolio investment with currency managers Millennium Global in London.
“They embraced the European negativity trade yesterday and they have had a reminder today that there is this thing called Brexit.”
Adding to pressure on the pound was a lower than expected reading which showed inflation still less than half of the Bank of England’s 2 percent target.
A rout on bond markets and a surge in concern over elections in major European countries next year have sent the dollar soaring against the euro in the past week and offered cover to any who wanted to cash in gains built up by betting on the pound’s collapse since June.
But ahead of the formal launch of exit talks with Brussels early next year, sterling remains among a “sell” for many speculative and long-term players.
“Added newsflow around Brexit means that there is still added downside pressure for sterling,” said James Hughes, chief market analyst with retail broker GKFX in London.
The pound fell as much as 1.3 percent to 87.07 pence per euro before recovering to 86.40 pence. It also lost more than half a percent to $1.2415.
“Our base case is that the Brexit negotiation process will not be easy, and that uncertainty will continue,” HSBC Global Head of FX Strategy David Bloom said in a special report on the outlook for G10 currencies.
“We therefore continue to see significant downside risks for sterling and forecast GBP-USD at 1.20 for year-end 2016 and 1.10 for year-end 2017.”
Editing by Richard Balmforth
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