LONDON (Reuters) – Sterling was recovering Monday morning after plunging to a 10-year low against the euro overnight amid bleak British economic data and no-deal Brexit jitters.
Second-quarter gross domestic product unexpectedly contracted in June, raising concern a recession was looming in Britain. That put pressure on sterling and British government bond yields — the spread between 10-year Gilt yields and U.S. Treasury yields shrank Monday to its lowest since Aug. 6.
“A significant compression of UK yields and Brexit undertones” are why sterling dropped against the euro, said Kamal Sharma, forex strategist at Bank of America (NYSE:) Merrill Lynch. This is a “natural breeding ground for sterling losses,” he said, a “double whammy effect.”
Low liquidity and media reports that Ireland would not renegotiate the Brexit backstop at a meeting with British Prime Minister Boris Johnson later this month also weakened sterling, analysts said, by exacerbating fears Britain would crash out of the European Union with no transition deal in place in October.
Johnson has accepted an offer to meet Irish leader Leo Varadkar to discuss Brexit and the Northern Irish backstop, according to British media. A meeting could take place before a G7 summit in France later in August.
The backstop, part of the withdrawal agreement that former Prime Minister Theresa May struck in November, is a sticking point in efforts to agree an orderly British exit from the EU.
Late Sunday, sterling plunged to 93.26 pence against the euro, the lowest it has been since October 2009, not considering the flash crash in October 2016. It also fell to a 31-month low of $1.2015 versus the dollar.
But on Monday the pound was up by 0.5% against the euro at 92.61 pence as renewed concern over Italian politics took the euro down against most major currencies. Sterling was also higher by 0.3% against the dollar and last at $1.2062.
Italian Deputy Prime Minister Matteo Salvini threatened to bring down the coalition government after saying he had lost faith in the coalition.
The euro was down by 0.2% at $1.1175 and by 0.6% at 117.63 against the Japanese yen.