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Sterling weakens amid political uncertainty

Tuesday 15:10 GMT

What you need to know
● Pound under pressure amid Brexit and Scottish secession worries
● Sterling drops below $1.22 and euro edges up towards 88p
● S&P 500 down 0.5 per cent as sliding oil hits energy stocks
● Treasury yields little changed ahead of Fed decision
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Hot topic

The UK pound is back under pressure as traders become concerned that Edinburgh’s demand for a another referendum on Scotland leaving the UK adds to the uncertainty over Britain’s divorce from the EU.

Sterling accelerated losses in early European trading once it breached the $1.22 level, and is down 0.6 per cent at $1.2149 to once again flirt with eight-week lows.

It now takes 87.53 pence to buy one euro, up 0.4 per cent on the day.

“The progress of Brexit negotiations should remain the key driver of pound performance in the coming years. The pound could weaken temporarily again closer to a second [Sottish] referendum which could help to keep it weaker for longer,” said Lee Hardman, currency analysts at MUFG.

“However, we remain comfortable with our view prior to the first referendum that it should not significantly impact the long term fair value of the pound even if Scotland leaves the UK. Independence is a much bigger development for Scotland than for the rest of the UK and the pound,” he added.

The retreating pound is offering some support to London’s blue-chip equity index. The FTSE 100, replete with foreign currency earners that are seen benefiting from softer sterling, is down 0.2 per cent.

Equities

The tone across stock markets is generally cautious as traders are wary of making bold bets ahead of a plethora of events this week: including the Dutch general election, and monetary policy decisions from the central banks of the US, UK and Japan.

In New York, the S&P 500 is down 0.5 per cent at 2,361, 35 points shy of its record closing high touched at the start of the month. Trading volumes may be thin on Wall Street as a big snowstorm blankets the US north east.

The pan-European Stoxx 600 index is down 0.4 per cent as banks and resources groups see losses, the latter in response to a fresh slide in the oil price.

However, resources stocks supported the Australian market, where the S&P/ASX 200 was flat as financials struggled.

Greater China shares exemplified the mildly mixed mood in Asia, with Hong Kong’s Hang Seng index flat and the Shanghai Composite up less than 0.1 per cent.

Japan’s Topix dipped 0.2 per cent as shares in Toshiba rose 5.6 per cent after the company confirmed it had been granted a one-month extension to the March 14 deadline for filing third-quarter results.

Forex

The euro is down 0.1 per cent to $1.0640 as investors await the outcome of the Dutch election, due to take place on Wednesday.

The dollar index, which measures the greenback against a basket of peers, is up 0.3 per cent at 101.56 as investors continue to price in a 93 per cent chance — according to CME FedWatch — that the Federal Reserve will raise interest rates by 25 basis points this week.

The dollar is down 0.2 per cent versus the Japanese yen at ¥114.68 and the Turkish lira is 0.3 per cent weaker at 3.7521 per buck as Ankara’s relations with a number of European countries deteriorate.

Fixed income

The recent trend of higher sovereign bond yields is stalling in response to the pullback in S&P futures and as traders wait for Wednesday’s Fed decision.

The US 10-year Treasury yield, which moves opposite to the price, is down 1 basis point to 2.59 per cent, inching back from its highest level since September 2014.

The equivalent maturity German Bund is off 2bp to 0.45 per cent, having earlier in the session hit 0.51 per cent, its highest in nearly 14 months after data confirmed inflation of 2.2 per cent in the eurozone’s biggest economy.

Commodities

Oil prices initially were striving to rally after last week’s sharp sell-off which came in response to fears that US production is counteracting Opec’s output cuts.

But major contracts have turned lower again after Opec on Wednesday raised its forecast for production outside the cartel.

Brent crude, the international oil marker, is 1.7 per cent lower at $50.47 a barrel, its cheapest in more than three months. West Texas Intermediate, the main US contract, is sliding 2.3 per cent to $47.30.

The firmer dollar is not hurting gold, with the precious metal up $2 to $1,205 an ounce.

Additional reporting by Hudson Lockett in Hong Kong

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