Sterling hit by 'Brexit' worries after London Mayor joins 'out' camp

The pound fell almost 1 percent against the dollar, euro and yen over concerns that Britain would quit the European Union
Generic picture of some Sterling notes and coins are displayed together. (Getty Images)
By Reuters
Mon 22 Feb 2016 12:31 PM

Sterling tumbled on Monday, hitting a two-year low against the yen, as concern grew that Britain would quit the European Union after influential London Mayor Boris Johnson threw his weight behind the exit campaign.

The pound fell almost 1 percent against the dollar, euro and yen, nearly reversing gains made on Friday after EU leaders agreed unanimously on a package of measures aimed at keeping Britain in the 28-nation bloc.

It slid as far as $1.4235 from around $1.4405 late on Friday before stabilising around $1.4275, down 0.9 percent on the day.

Against the yen, it slumped to as low as 160.40 yen, its lowest level since November 2013, from 162.10 late on Friday.

The euro briefly popped back above 78.00 pence and last stood at 77.85, bringing back its 14-month peak of 78.975 hit earlier this month within sight.

Johnson said on Sunday that Prime Minister David Cameron had failed to deliver fundamental reform with the agreement and that he would advocate Britain leave the EU. His stance could increase the chances Britons will vote against EU membership in a June referendum.

"Political uncertainty generated by the UK referendum will weigh on GBP," said Elias Haddad, currency strategist at Commonwealth Bank.

As dealers expect choppy trading in coming months towards the referendum, implied volatilities on sterling options rose to near highest levels in more than four years.

The six-month implied volatility in the cable rose to 11.613/12.063 percent, near a four-month peak hit earlier this month while that for the euro/sterling rose to a four-year high of 11.875/12.275 percent.

With investors seeking protection for a plunge in the British unit in case of "Brexit", pound puts are in stronger demand compared to pound calls.

Risk reversal spreads, which measure the price gap between calls and puts, widened in favour of sterling puts, with the six-month spread hitting a four-year high.

Apart from the British pound, the other major currencies were steadier.

The dollar was a touch firmer at 112.88 yen, 0.2 percent above its levels at the end of last week, and off Friday's one-week low of 112.30.

Stemming the safe-haven yen's advance for now was speculation that G20 finance ministers and central bank governors may address routs in financial markets this year when they gather in Shanghai later this week to discuss the global uncertainty.

Their focus should be on global economic spillovers from their policy decisions, said Christine Lagarde, the managing director of the International Monetary Fund.

That helped the dollar keep some distance from a low below 111 touched earlier this month, when investors were hit by worries about slowdown in the global economy and European banks.

Yet traders also question just how much G20, a forum of countries with diverse background including both developed and developing countries, could agree on anything substantial to bolster the global economy.

"G20 have never really acted together. The best I would hope for from them is nobody will say anything disruptive to markets," said a trader at a Western bank.

Indeed, given persistent worries about global economic health, dollar bulls shrugged off data last Friday that showed underlying U.S. consumer price inflation accelerated in January by the most in more than four years.

The figures should support the view that the Fed will gradually raise interest rates this year as forecast, but markets remained sceptical, given slowing global growth and market turbulence.

The euro weakened against the dollar to $1.1110 but stayed within its well-worn range in the past few days.

Against the yen, the common currency fetched 125.49 yen, not far from 2 1/2-year low of 125.02 yen touched on Friday and earlier on Monday.

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