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Pound struggles to hold gain as concern shifts

London - The pound struggled to hold onto last week’s gain as concern escalated that banks may leave Britain should it opt for a “hard” Brexit that restricts their access to the single market.

Sterling was little changed against the dollar and euro after Anthony Browne, chief executive officer of the British Bankers’ Association, wrote in an article published on the Guardian’s website that bankers’ “hands are quivering over the relocate button.”

An exodus of banks would challenge the economy because financial services pay more than £60bn in tax each year. Sterling has dropped 18% since Britain voted in June to leave the European Union without defining its stance in negotiating the terms of departure.

“The news flow about potential departures of banks in the wake of a hard Brexit next year is not supportive of the pound,” said Valentin Marinov, head of Group-of-10 currency strategy at Credit Agricole SA’s corporate and investment-banking unit in London.

“The problem with the pound is that most clients do not see any trigger for its sustained rebound. That said, the pound is cheap, as a lot of negatives are already in the price. ”

The pound was little changed at $1.2235 at 13:05 after falling by as much as 0.4% earlier. The currency rose 0.4% last week, halting a two-week, 6% decline. It was at 89.03 pence per euro.

Gilts climb

UK government bonds rose, pushing 10-year gilt yields down four basis points to 1.04%. The 1.50% security due July 2026 climbed 0.415, or £4.15 per £1 000- face amount, to 104.22.

The falling pound is starting to bite. Microsoft said it will increase the price of its enterprise software and cloud offerings in the UK by as much as 22% to adjust to the weaker currency. Inflation increased to an annual 1% in September, the fastest in almost two years, and analysts forecast it will accelerate further as the impact of the plunging pound is fully accounted for.

Large speculative investors including hedge funds reduced their net short positions on sterling against the dollar, or bets the currency will fall, to 91 558 contracts last week from 95 470 contracts in the previous period, according to the Commodity Futures Trading Commission. Still, that is close to the record 97 572 contracts reached in the first week of October.

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