Sterling clawed its way back above $1.30 on Thursday as investors, buoyed by a modest revival in risk appetite, booked profits on bets made against it, though the outlook for the currency remained grim after Britain’s shock vote to leave the EU.
As European stock markets rose, demand for the safe-haven yen ebbed and the growth-linked Australian dollar weathered a cut in the country’s credit rating outlook by Standard and Poor’s.
Sterling was up 0.9 per cent against the dollar at $1.3044 , having skidded to a 31-year low of $1.2798 on Wednesday. It is down over 14 percent since the Brexit vote, with some analysts expecting it to drop to $1.20 in coming months as the Bank of England prepares to ease monetary policy.
“Sterling momentum has eased a bit here and perhaps a two-way market is a bit overdue, as investors will require new reasons to get even more short against the currency,” said John Hardy, head of currency strategy at Saxo Bank.
The dollar was 0.2 per cent lower against the yen at 100.97 yen, holding above its trough of 99 yen hit on June 24, the day after the UK vote. Traders were focused on the private sector ADP jobs report for a picture of the US labour market. Forecasts are for 159,000 job additions, down from 173,000 last month.
“We’ve seen a dramatic shift in Fed (monetary policy) expectations over the past few weeks, pushed by the US jobs data and the uncertainties created by the Brexit vote,” said Simon Smith, chief economist at FXPro.
“There are growing concerns that the US is facing a more sustained cyclical slowdown in the economy, which will put to bed any further expectations of Fed tightening of this year.”
That is likely to hit the dollar, especially against the yen, traders said. But most will be cautious about pushing the yen much higher given the risk of intervention by the Bank of Japan.
Sharp yen gains are usually followed by verbal warnings from Japanese financial officials, one of whom said on Wednesday that the finance ministry was closely watching the currency market to see if speculative factors were behind market moves.
Bank of Japan Governor Haruhiko Kuroda said on Thursday the central bank was ready to expand monetary stimulus further if needed to achieve its 2 percent inflation target, but he made no mention of the Brexit vote that has spread turmoil in financial markets.
The Aussie fell as low as $0.7467, after S&P downgraded the outlook on Australia’s AAA credit rating to negative from stable. But the currency pared losses to $0.7518, flat on the day.
The ratings agency warned that deadlock on government policy after Saturday’s inconclusive elections could endanger Australia’s rating in the long run.