- BOE's Weale says need for tigher policy is less immediate
- U.K. referendum on EU membership could happen as early as June
The pound held five days of declines against the dollar as bets on a further drop in the options market were close to their highest level since July.
Traders are taking an increasingly adverse view on the pound’s outlook versus the dollar as forwards contracts failed to signal the Bank of England would speed its decision to increase interest rates after the Federal Reserve raised this month in the U.S. Meanwhile, the referendum on Britain’s European Union membership may take place as early as June after Prime Minister David Cameron was optimistic about the progress of talks. The vote could damp oversees investment into the U.K., strategists said.
“A shift in gears by Prime Minister Cameron and a possible summer 2016 referendum is likely to mean an upturn in volatility for the pound,” Derek Halpenny, the London-based head of European head of global markets research at Bank of Tokyo-Mitsubishi UFJ Ltd., wrote in a note to clients. Foreign direct investment makes up a sizable portion of the U.K.’s financing needs for its current account deficit and fears of a break with the EU could slow these flows, he wrote.
The premium for three-month contracts to sell the pound versus the dollar over those to buy widened into a fifth week. The premium was at 1.03 percentage points Monday as of 4:40 p.m. London time. That’s after widening to 1.07 percentage points on Dec. 9, the most since July 14, according to risk-reversal prices compiled by Bloomberg.
The pound was little changed at $1.4887, after falling 2.1 percent last week. Sterling weakened 0.7 percent to 73.44 pence per euro.
BOE policy maker Martin Weale said there had been a surprise “pause in wage growth” and together with the extended drop in commodity prices these have made the need for tighter policy “slightly less immediate.” In an interview with the Telegraph published on Sunday, Weale said the factors pushing down inflation had become more prolonged. Weale last voted for an increase to the bank’s 0.5 percent interest rate in December 2014.
Forward contracts based on the sterling overnight index average, or Sonia, aren’t fully pricing in a 25-basis-point increase to interest rates until February 2017.
“A further pushback of rate-hike expectations may mean further selling of the pound over the short-term,” Halpenny said. “We still see a high chance of the BOE acting to hike rates in May, but perhaps by then the pound will be at much weaker levels than today.”