LONDON: Sterling fell to a 13-month low against the euro on Monday, as a sell-off in global stock markets hit currencies perceived to be riskier with uncertainty about Britain's place in the European Union also weighing on sentiment.
Britain's top share index joined other global indices, dropping to its lowest level in over two weeks, weighed down by banking stocks which hit multi-year lows.
Bank stocks in Europe and the UK were deep in the red with traders citing lower earnings as one of the factors. Britain's huge banking and financial sector helps in plugging the country's current account gap and any risk to the sector is likely to hit the pound, traders said.
The pound hit a 13-month low against the euro. The single currency, often preferred during times of financial market stress, was up 0.8 percent at 77.59 pence and has gained more than 5 percent this year.
Sterling shed 0.6 percent to trade at $1.4415, off the one-month high of $1.4672 it hit last Thursday after Bank of England chief Mark Carney quashed talk that interest rates could be cut in the coming months.
Data from the Commodity Futures Trading Commission released on Friday showed speculators had trimmed their net bets against the pound last week. They had been aggressively adding to their unfavourable bets since the start of the year, pushing the pound to a seven-year low in late January.
ROUGH WEEK
A rough week for the dollar helped sterling stage a recovery. The U.S. currency lost more than 3 percent against a basket of currencies before a good U.S. jobs report lifted it from lows.
"After benefiting from dollar weakness across the currency markets last week, it looks like the correction in sterling/dollar might have concluded," said Jameel Ahmad, chief market analyst at FXTM.
"There are still concerns about slowing economic momentum in the United Kingdom, while ongoing uncertainty over whether there will be a Brexit referendum to vote on UK membership of the EU should continue to haunt investors."
A YouGov poll released last week showed those campaigning for Britain to leave the European Union had taken a nine-point lead. The poll showed 45 percent of Britons would vote to leave the bloc compared with the 36 percent who want to remain.
Nineteen percent said they did not know or would not vote. Markets and punters are betting that the referendum is likely to be held in June.
Traders expect uncertainty stemming from the referendum to keep the pound choppy in the coming months and possibly force the central bank to keep rates lower for longer. Most economists think Brexit would hurt growth in the short-run -- Citi predicts a 4 percent hit over three years.
"The Brexit debate has gained momentum, with PM (David) Cameron on the back-foot, as indicated by recent survey data," Morgan Stanley strategists said in a note recommending investors to sell the pound against the safe-haven yen.
"BoE minutes and the quarterly reflation report leave the impression that there is no rush hiking rates. Finally, mixed economic signals suggest that the fiscal tightening works now in a pro-cyclical way."
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