Dollar weakness hoists pound, but outlook bleak

LONDON: Sterling gained on Thursday, erasing most losses earlier this week after US Federal Reserve Chairman Jerome Powell left the door open for rate cuts, though Britain's struggling economy and fears of a disorderly Brexit weighed on the currency.

The pound edged higher thanks to broad-based dollar weakness, snapping a recent losing streak. The British currency plumbed to a two-year low this week at $1.2439 before recouping some losses. On Thursday, it gained 0.5% to $1.2570.

Versus the euro, the pound edged higher to 89.71 pence but was still on track for a record tenth consecutive week of losses.

Though Thursday offered some relief for the beleaguered pound as the greenback struggled after Powell struck a downbeat tone in congressional testimony on Wednesday, the British currency remained weak overall, down 3.7% in the last three months.

"Sterling is torn between the likelihood of Britain leaving the EU without a deal, and potential rate cuts by the Fed," said Marc-Andre Fongern, head of forex research at MAF Global.

DOLLAR PARITY?

If Britain were to leave the European Union with no deal, this would cause the pound to plummet to the same value as the dollar, Virgin boss Sir Richard Branson told the BBC.

Dismal data and the risk of Britain crashing out of the EU without transitional trade arrangements has forced the Bank of England to change its upbeat assessment of the economy, prompting hedge funds to ramp up short bets against the currency to their highest levels since October 2018..

Its hitherto hawkish stance, at odds with other central banks in the developed world, had been a key source of support for sterling this year.

A Citigroup economic surprise index in Britain has dropped to its lowest levels in eight years while similar gauges in Europe have stabilised.

"I simply don't see a catalyst for the pound to go up right now," said Kit Juckes, macro strategist at Societe Generale.

If sterling were to fall to the same value as the dollar, that would make an "incredibly weak pound," Juckes said.

BoE Governor Mark Carney said UK exporters to the EU "show a mixed picture on no-deal Brexit preparedness, (but) not all the way there."