Wednesday 12 October 2016 1:55 pm

Sterling falls back after posting early morning gains

The pound fell back in afternoon trading today, slipping below $1.22 after an early morning rally saw it reverse yesterday's hefty losses.

Sterling hit a low of $1.2086 late last night after American traders took a decidedly pessimistic view on the currency, wiping two cents off sterling in a matter of four hours.

After investors' fears of a hard Brexit subsided when Theresa May indicated she would keep parliament informed of the negotiations, the pound regained some momentum this morning, briefly climbing over $1.23 against the US dollar.

However, as soon as New York started clocking into the office, the pound was back with a fight on its hands – dropping more than half a cent against the dollar in 25 minutes to stand at $1.2176.

Sterling hasn't been helped by recent strength in the dollar and while US traders undoubtedly have one eye on the UK political scene, attention will also be drifting towards crunch minutes from the latest meeting of the Federal Reserve, published this evening. Traders will be looking for clues over the likelihood of a rate rise before Christmas, with markets currently divided nearly 50-50 as to whether Janet Yellen will pull the trigger in 2016.

Despite the stumble, the pound was still up 0.5 per cent on the day against the dollar and 0.8 per cent against the euro and looked on course to break a run of four consecutive losing days.

That will be of little solace to anyone backing the pound who have watched the sterling crash from above $1.31 before Theresa May declared Article 50 will be triggered by the end of next March at the Tory party conference. However, many hopes about the UK economy in the wake of the EU referendum have been placed on the weaker pound prompting a surge in British exports.

Kallum Pickering of Berenberg said volatility would remain heightened for the foreseeable future. "Brexit risks will dominate the outlook for sterling for at least two years – or until the UK finally exits the EU."

He added: "Overall, any positives that come from the weaker sterling are outweighed by the long-term risks underpinning its depreciation."

JP Morgan's Thushka Maharaj said: "We still see further downside risk to sterling, particularly versus the US dollar, but we are very conscious that this will not be a straight line move in the currency.

"Although we are positioned for the possibility of a short-term bounce back, on a 12-month horizon we expect more currency weakness, given the uncertainty on Brexit negotiations."

The dramatic swings in the pound have prompted investors to slash their outlook for sterling over the rest of the year. Yesterday, the newest member of the Bank of England's monetary policy committee, Michael Saunders, said he would not be surprised if sterling fell further, citing the UK's large current account deficit as a stubborn point of weakness.

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