Why the pound has suffered its worst week in a year
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, sterlingâs performance on foreign exchange markets went from bad to worse as plans of a coup dâetat 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 âperfect stormâ has caused the bloodbath on currency markets this week with the pound âgetting hit on all frontsâ, said ING foreign exchange strategist Viraj Patel.
He added that sterlingâs weakness this week against the euro, which itself has been âplagued by its own political risks with Cataloniaâ, demonstrates that the poundâs 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.
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 managersâ index, a closely watched survey regarded as a key sector health checker, mildly restored the marketâs 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.
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.
âFor 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 inflationâ, said CMC Markets analyst David Madden on the positive reaction to the figures on the markets.