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FX round-up: Pound dips below $1.40 as Brexit nerves continue
Sterling dipped below $1.40 as political and economic uncertainty over Brexit continued to play on the minds of currency traders.
The pound fell to a one-week low against the dollar in early trading after a leaked government paper said Britain would be worse off under all plausible post-Brexit scenarios, with a strong influence also coming from higher US treasury yields and feelings the dollar had become oversold. After slipping past $1.40 sterling recovered trade up 0.4% against the greenback at $1.4136.
That left the pound slightly down on the day and about 2% lower than a post-referendum high of $1.43 it reached the previous week. The UK currency also fell against the euro for the fourth straight day, before a rally from a deficit of 0.2% saw regain parity on the day at 1.1368.
Sterling had climbed steadily against the dollar during January as investors became more optimistic about the prospects for Brexit talks. The dollar also declined against major currencies during that period.
After the UK and the EU patched together provisional terms for talks before Christmas the past few days have seen fresh uncertainty over Brexit negotiations and the stability of Theresa May's government. Divisions within the ranks of May's Conservative MPs over leaving the EU have revived talk of a move to oust her as prime minister this year.
Neil Wilson, senior market analyst at ETX Capital said: "A touch of dollar firmness [is] weighing but there are renewed concerns about Brexit that are hitting sterling. The EU seems to be dictating terms on the transition to the British government in a manner that has angered hardline Brexiters, risking a rift in the ruling Conservative party. May's premiership looks shaky at best."
Bank of England Governor Mark Carney is likely to face questions about Brexit when he gives evidence to the House of Lords' economic affairs committee later on 30 January.
The dollar gained in early trading but then turned lower against most major currencies as US Treasury yields edged back. The euro rose against the dollar after a survey indicated the eurozone economy grew in 2017 at its fastest rate since the financial crisis. The euro gained 0.3% to $1.2420 though it remained adrift of the three-year peak of $1.2538 reached the previous week.
US Treasury Secretary Steven Mnuchin encouraged selling of the dollar on 24 January when he said a weak dollar was good for trade. The Trump administration has since tried to retreat from his remarks and markets will watch the president's State of the Union speech later on 30 January for signals.
Jasper Lawler, head of research at London Capital Group, said: "It is unlikely the State of the Union will make any specific reference to the dollar. The Donald is unlikely to want a repeat of the confusion caused by the Treasury Secretary's pro-weak dollar comments. The most probable channel for dollar demand generated by Trump's State of the Union is via expectation for US growth."
The reappearance of risk aversion has lent support to both the yen and the Swiss franc, noted analysts at Rabobank.
Analyst Ken Odeluga at City Index said the "missions" into low-liquidity conditions outside the USD/JPY's 114-108 range last week "served a purpose".
"The yen is back for a second look, though the dollar's fight has returned somewhat. Current dollar support weakens under 108.5."
The yen is not in worrying territory, said his colleague Fiona Cincotta, but "if we see a fall towards 107.5-107, this would definitely set alarm bells ringing".