Why the Pound Suffered its Worst Week in a Year

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The pound has experienced its worst week in a year as speculation swirled that Tory MPs are planning to overthrow prime minister Theresa May, stoking fears on the markets regarding a fresh round of political uncertainty.

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

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

This week, a “perfect storm” has prompted the bloodbath on currency markets with the pound “getting hit on all fronts”, stated Viraj Patel, the ING foreign exchange strategist.

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

Mr Patel stated that the political infighting could hurt sterling an additional 1-2pc but continued that gilt yields that were brushing aside the heightened uncertainty was a silver lining.

Although sterling sank briefly during the now infamous speech of Theresa May dogged by coughing fits, pranksters and collapsing stage scenery, a small uptick in the services purchasing managers’ index, a closely guarded survey considered as a key sector health checker, lightly restored the confidence of the market in the UK economy to push the pound up on Wednesday.

However, that one positive session was sandwiched by four days of sharp retreat.

Yesterday, Sterling shortly flirted with a rebound against the dollar as Prime Minister May insisted that her Cabinet was supporting her but the rally was immediately extinguished by hurricane-battered US labour statistics conquering expectations, sterling pulling back an additional 0.6pc.

While the Hurricane Irma-distorted figures revealed that US payrolls weakened for the first time in seven years, falling by 33,000, traders concentrated on monthly wage growth picking up to 0.5pc to promote 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 David Madden, the CMC Markets analyst, on the positive reaction to the figures on the markets.