Pound drops as Brexit risks and economic woes bite

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LONDON, June 28 (Reuters) – The pound fell against the dollar on Tuesday, undermined by Britain’s gloomy economic and political outlook compared to other major economies, including government plans to scrap the pre-agreed rules on post-Brexit trade with Northern Ireland.

On Monday, British Prime Minister Boris Johnson pushed ahead with his plan to push legislation through parliament to overturn parts of a Brexit divorce deal over Northern Ireland trade. This decision angered the European Union.

“If the bill were to adopt its current form, it would clearly lead to a significant deterioration in relations with our main trading partner and it would be a big drag on the pound,” said Colin Asher, senior economist at Mizuho.

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The bill still has to go through the House of Lords, so any potential downturn in the currency is still far in the future, Asher said.

As of 3:30 p.m. GMT, the pound slipped 0.6% against the dollar to $1.2192.

It stagnated against the euro at 86,200 pence after hitting a nearly two-week low for the single currency.

Another potential headwind could come from Scotland where Prime Minister Nicola Sturgeon on Tuesday proposed another independence referendum for October 2023. read more

Johnson and his Conservative Party, which is in opposition in Scotland, strongly oppose a referendum, saying the issue was settled in 2014 when Scots voted against independence by 55% to 45%.

But the main focus for the pound is the UK economy and how the Bank of England will balance the fight against soaring inflation amid the growing risk of recession.

Inflation hit a 40-year high of 9.1% last month, the highest level among G7 countries.

Traders will be listening closely to Bank of England Governor Andrew Bailey, who is due to speak at a European Central Bank forum on Wednesday, for clues about the BoE’s plans to hike rates during his August meeting.

“We all expect the Bank of England to hike rates by 50 basis points, that’s the market consensus; anything that fails will create downsides for the pound,” said Ricardo Evangelista, senior analyst at ActivTrades.

“There is some pessimism around the UK economy and the medium-term direction of the pound is definitely bearish in my view,” he added.

Meanwhile, a poll by US bank Citi and pollsters YouGov showed that the British public’s expectations for inflation in the coming years fell this month to their lowest level since January. Read more

But analysts say UK inflation has yet to peak and some are expecting bigger rate hikes of 50 basis points over the summer.

“It’s better to overdo it and relax next year than to underdo it in the short term as their inflation-fighting credentials come into question,” Mizuho’s Asher said.

Aggressive rate hikes are also expected from the Fed, but the US central bank is expected to suspend hikes towards the end of the year. The resulting narrowing of interest rate spreads should support the pound, he said.

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Reporting by Lucy Raitano; Editing by Raissa Kasolowsky and Shailesh Kuber

Our standards: The Thomson Reuters Trust Principles.

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