Sterling plunged to 93.26 pence against the euro, late on Sunday, 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 it was recovering as Brexit uncertainty continues to bite amid looming fears of a no deal exit from the EU on October 31. Second-quarter GDP unexpectedly contracted in June, raising concern a recession was looming in Britain.
This put pressure on sterling and British government bond yields, while the spread between 10-year Gilt yields and US Treasury yields shrank to its lowest since August 6.
Kamal Sharma, forex strategist at Bank of America Merrill Lynch said: “A significant compression of UK yields and Brexit undertones” was the reason why Sterling had dropped against the euro.
Desrcibing it as a “double whammy effect”, he said it a “natural breeding ground for sterling losses”.
Neil Wilson, chief market analyst at Markets.com, said: :The combination of a slowing economy, global economic weakness, the increasing chance of a cut to interest rates and the risk of a no deal Brexit will continue to anchor sterling.
“No deal talk is the biggest concern – remove that and we get a big bounce even with the economic and monetary risks.”
Analysts said low liquidity and reports Ireland would not renegotiate the Brexit backstop at a meeting with British Prime Minister Boris Johnson later this month also weakened sterling by exacerbating fears Britain would leave the EU without a deal in place in October.
Mr Johnson has accepted an offer to meet Irish leader Leo Varadkar to discuss Brexit and the Northern Irish backstop. 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, has been a sticking point in efforts to prevent a disorderly British exit from the EU.
READ MORE: Pound to euro exchange rate: Sterling ‘shrunk’ since December 2012