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Why the pound has suffered its worst week in a year

Tom Rees
The uncertainty surrounding Theresa May has pulled down the pound - Geoff Pugh for the Telegraph

The pound has endured its worst week in a year as speculation swirled that Tory MPs are preparing to topple prime minister Theresa May, stoking fears on the markets of a fresh bout of political uncertainty.

Already wounded by weaker-than-expected data from the construction and manufacturing sectors earlier in the week, sterling’s performance on foreign exchange markets went from bad to worse as plans of a coup d’etat at Number 10 weighed heavily on the currency.

Against the dollar, which has conversely enjoyed another strong week, sterling tumbled by 2.5pc to below $1.31 over just five days while against a trade-weighted basket of the leading currencies, it shed 2.1pc.

A “perfect storm” has caused the bloodbath on currency markets this week with the pound “getting hit on all fronts”, said ING foreign exchange strategist Viraj Patel.

The events hurting the pound this week

He added that sterling’s weakness this week against the euro, which itself has been “plagued by its own political risks with Catalonia”, demonstrates that the pound’s underperformance story has been the dominant force on the markets.

Mr Patel said that the political infighting could knock sterling a further 1-2pc but added that gilt yields brushing aside the heightened uncertainty was a silver lining.

The pound has had its worst week for a year

Although sterling briefly sank during the now infamous Theresa May speech dogged by coughing fits, pranksters and collapsing stage scenery, a slight uptick in the services purchasing managers’ index, a closely watched survey regarded as a key sector health checker, mildly restored the market’s confidence in the UK economy to nudge the pound up on Wednesday.

That one positive session was, however, sandwiched by four days of sharp retreat.

Sterling briefly flirted with a rebound against the dollar yesterday as Mrs May insisted that her Cabinet was behind her but the rally was quickly extinguished by hurricane-battered US labour statistics beating expectations, sterling pulling back a further 0.6pc.

The dollar has strengthened following strong US economic performance

While the Hurricane Irma-distorted figures showed that US payrolls declined for the first time in seven years, dropping by 33,000, traders focused on monthly wage growth picking up to 0.5pc to boost the dollar on forex markets.

“For a long time the relatively low wage growth was a concern for investors but now that we are seeing earnings tick up it should translate to higher consumer spending and, in turn, an increase in inflation”, said CMC Markets analyst David Madden on the positive reaction to the figures on the markets.