Sterling reaches 2-1/2-year low against euro

Sterling hit on Tuesday a 2-1/2-year low against the euro and traded less than half a U.S. cent away from a 31-year trough versus the dollar in risk-averse markets, ahead of a financial stability review from the Bank of England.

A survey of purchasing managers from Britain’s dominant services sector for June, which should capture some of the immediate reaction to the UK’s vote to leave the European Union, is due at 0830 GMT.

Some investors are anxious that the number could be very weak following Monday’s data showing the construction industry suffered its worst contraction in seven years.

Against the euro, sterling shed 0.7 percent to 84.58 pence, its weakest since December 2013.

Sterling also fell 0.9 percent to $1.3163 in early London trade, its weakest since it hit the low of $1.3122 it hit last Monday.

Earlier, the Australian dollar inched lower as investors braced for the central bank to potentially signal an imminent easing at its review later in the day, while the safe-haven yen got a lift from worrying signs in China’s service sector.

Trading was subdued with no directional clues from U.S. markets, which were shut on Monday for the Independence Day holiday.

A private survey showed that activity in China’s services sector rose to an 11-month high in June, but a composite measure of activity fell to a four- month low. That raised fears the services sector may not be able to make up for a prolonged decline in the industrial economy that has pushed China’s growth to 25-year lows.

“There are no domestic factors that could explain the yen’s strength, so it appears to be the ‘risk-off’ effect from China that’s bringing the dollar/yen to test the 102 level,” said Ayako Sera, market economist at Sumitomo Mitsui Trust Bank in Tokyo.

The dollar was down 0.4 percent at 102.09 yen, while the euro fell 0.7 percent to 113.63 yen.

The Aussie slipped 0.3 percent to $0.7511, though it remained within site of Monday’s more than one-week high of $0.7545.

The Reserve Bank of Australia is widely expected to skip a chance to ease again as it awaits second quarter consumer price data due on July 27, but markets are betting on a cut in August given low inflation and uncertainty following Britain’s vote to leave the European Union.

All 37 economists polled by Reuters last week expected the RBA to keep the cash rate unchanged at a record low 1.75 percent.

But possible policy paralysis after no clear winner emerged from a weekend election continued to threaten the Aussie’s outlook, in addition to the potential Brexit fallout.

“Brexit is not a direct threat to Australia, but over time the hit to investment and risk-taking sentiment may weigh on commodity prices, adding to the pressure on the RBA,” Marshall Gittler, head of investment research at FXPrimus, said in a note.

“At the June meeting, the RBA basically kept a neutral stance and made no comment about which way the next move might be. The market will be focused on whether the statement continues that neutral stance or moves to an outright easing bias,” Gittler said.

Brexit has ramped up the urgency for some Asian central banks to ease monetary policy, as a prolonged period of uncertainty threatens a wider downshift in trade and investment.

The timing of Britain’s actual exit from the EU remains unclear, and against this backdrop, investors have begun to hope for additional stimulus and UK corporate tax cuts to blunt the impact of the move.

Sterling shed 0.3 percent to $1.3246, but remained above last week’s 31-year trough of $1.3122 plumbed in the wake of the Brexit vote.

The U.S. dollar index, which tracks the greenback against a basket of six rival currencies, edged down slightly to 95.626.

The euro inched down 0.2 percent $1.1130.

Source: Reuters