Worries about the political and economic risks from Britain's pending exit from the European Union drove sterling to a five-week low on Tuesday in markets thinned by anticipation of U.S. and Japanese central bank meetings.
While the economy has ridden out the immediate aftermath of June's vote to leave the EU better than financial markets had expected, the past week has brought the first serious discussions of the terms on which it will leave.
"The noise on Brexit over the past week has given us more reason to sell any rallies," said Tobias Davis, head of corporate treasury sales at Western Union in London.
"$1.33 was viewed as a short-term uptick by most in the market and a decent enough level to sell."
There was no obvious catalyst for Tuesday's moves but dealers said it was big picture worries over Brexit.
"The market in general is just starting to think that although it wasn't a complete disaster in the first couple of months, all of the big problems are still ahead of us," the head currency dealer with one large custodial bank in London.
The head of Germany's Bundesbank warned on Monday that banks based in Britain would lose "passporting" access to EU markets after Brexit unless the country remains in the broader European trading group that includes nations such as Norway.
London's huge financial sector accounts for around 10 percent of the UK economy as a whole.
According to figures compiled by sector regulator the Financial Conduct Authority (FCA), 5,476 UK-regulated financial firms use passporting rights to operate in other EU countries. But 8,008 EU firms also used them to sell services in Britain.
The custodial bank dealer - who asked not to be named - also pointed to the lack of support for the pound below post-Brexit vote low of $1.2798 but underlined that pricing was not there yet.
"It always looks heavy at the bottom and I do think this move might be a bit overdone. There is uncertainty, but that works both ways," he said.
This week's big focus is the Bank of Japan and U.S. Federal Reserve meetings both ending on Wednesday, with expectations higher for action by the former as it battles a strong yen and long-running low inflation.
That follows a Bank of England meeting last that stuck with a warning about the risks to the economy of the Brexit talks, saying it may still need to cut interest rates again this year.
Positioning data suggests investors have become net slightly less negative on the outlook for the pound in the past week while still holding massive "short" bets that leave them exposed to any rise.
Analysts from Dutch bank ABN Amro said they had upped their forecasts for the pound for the end of the year.
"With positions being this substantial, other positive surprises in UK macro-economic data will likely result in an enormous squeeze of these net-short sterling positions," ABN analyst Georgette Beale said.
"Our year-end forecasts for EUR/GBP and GBP/USD are 0.83 and 1.33, respectively. The risk is tilted towards the upside."
(C) Reuters News
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