Pound Halts Gains as `Brexit' Risk Outweighs Quicker Inflation

What’s Behind U.K.’s Rising Inflation Rate?
  • Sterling retreats from one-week high versus dollar, euro
  • IMF cuts U.K. growth outlook and warns of damage from `Brexit'

The pound ended a two-day gain versus the dollar as concern that the U.K. would vote to leave the European Union outweighed an earlier boost to the currency when data showed U.K. inflation quickened more in March than economists predicted.

Sterling pared an advance versus the euro as the International Monetary Fund cut its U.K. growth forecast and warned of “severe” damage to the world economy if Britain quits the EU. An ICM online poll published Tuesday showed 42 percent of voters supported the U.K. remaining in the single market, compared with 45 percent who back leaving. The pound strengthened earlier after the Office for National Statistics said annual inflation quickened to a 15-month high of 0.5 percent in March, supported by spending over the Easter holiday.

While the measure is moving closer to the central bank’s target of 2 percent, markets are still not pricing for policy makers to raise rates this year. Officials will announce their next policy decision on Thursday.

“The poll saying the leave campaign is leading is keeping the ‘Brexit’ risk at elevated level,” said Thu Lan Nguyen, a currency strategist at Commerzbank AG in Frankfurt. “This is reflected in generally weak sterling as well as elevated euro-pound risk reversals” which show a premium on bets that the pound will decline.

The pound was little changed at $1.4239 as of 5:10 p.m. London time, after jumping as much as 0.8 percent earlier to $1.4348. Sterling appreciated 0.2 percent to 79.99 pence per euro.

The EU debate has been weighing on the pound, sending it tumbling against all of its 16 major peers this year. In a quarterly update to its World Economic Outlook, the IMF cited a potential U.K. exit as one of the key international risks and said it could do “severe regional and global damage by disrupting established trading relationships.”

The U.K. currency has fallen 3.4 percent against the dollar this year and is 7.8 percent weaker versus the euro. Options trading suggests sterling will extend declines against the greenback and slide more than any of its major counterparts over the next six months, risk-reversal data compiled by Bloomberg show.

“We continue to favor short positions in cable” in the run-up to the referendum, said Roberto Cobo Garcia, a strategist at Banco Bilbao Vizcaya Argentaria in Madrid, referring to bets that Britain’s currency will depreciate against the dollar. “U.K. data and their impact on the BOE reaction remain overshadowed by the greater risks tied to the ‘Brexit’ referendum.”

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