Sterling clawed back some ground against the dollar and euro on Tuesday but in the context of an historic 11% fall after Britons voted last week to leave the EU, analysts said this was merely a pause rather than the start of any upward trend.
The pound's rise, more than 1% at one point, would under normal market conditions be considered a decent rebound, but the move seemed modest, given that Thursday's Brexit referendum triggered the currency's biggest fall in modern history, to a 31-year low.
Sterling fell about 7% on Friday alone - its biggest one-day fall in the post-1973 floating-exchange-rate era. On Tuesday, the highest it hit in morning trade was $1.3373 , still almost 17 cents lower than where it was trading before the referendum results started to be announced.
Ratings agencies S&P and Fitch both downgraded Britain's sovereign credit standing on Monday, judging Brexit would hurt the economy, though that did not seem to further dent sterling.
By 0845 GMT on Tuesday sterling was up half a percent on the day at $1.3299.
Bank of Tokyo-Mitsubishi UFJ's European head of global markets research, Derek Halpenny, said he was dubious that the rebound would last and sterling's correction lower was not over. Political rhetoric, he said, would be likely to move the pound to and fro over the coming days and weeks.
"Like all markets, there's bound to be periods when we get some modest rebound or consolidation," Halpenny said.
"Why today? Perhaps it's a sense of some of this backtracking that's taking place from the 'Leave' side in terms of immigration in particular, which might be an indication that they're looking to get a still quite a favourable deal in regard to access to the single market," he said.
Halpenny was referring to comments made by Conservative MEP Daniel Hannan on Friday, who said the "Leave" campaign never promised a radical decline of immigration, and by anti-EU UKIP leader Nigel Farage, who on Monday said he was "nervous" about some of the comments that had been made after the referendum.
Some analysts said one factor helping to calm investors were signs there was no rush among British and European politicians to trigger the legal "Article 50" process that starts mechanisms for a state to leave the EU.
The world's biggest banks are considering a fall in sterling to $1.20, as fears of recession and banking trauma after Brexit threatened a return to the dark days of the early 1980s. Forecasts for its rate by the end of the year have been cut by up to 30 cents since Friday morning.
Most analysts agree the euro will suffer along with sterling from a fall in demand and investment as European businesses worry about fallout, reducing sterling's weakness against the single currency, though it has fallen sharply against that too.
On Tuesday it rose 0.2% against the euro to 83.18 pence, having hit its weakest for more than two years on Monday.
Against the safe-haven yen, which had rallied strongly after Thursday's vote and hit a 3-1/2-year high against the pound, sterling rose as much as 1.5% on the day to trade as high as 136.77 yen.
Strategists said SONIA forwards fully priced in a Bank of England rate cut by the end of the year, and a more than 50% chance of one by August, which should keep sterling weak. Before the vote, they suggested only a 20-30 percent chance of a cut by year-end.
"There's a pattern for Monday mornings to extend moves of the previous week before Tuesday sees everyone take stock - I know a technical analyst who removes Friday afternoon and Monday morning data from his charts to compensate," Societe General macro strategists said in a note to clients.
"That's the context in which we should look at market moves overnight." (Reuters)
Source: www.businessworld.ie
