Pound Slides to Two-Month Low as BOE Warns of Brexit Risk

BOE Warns of Brexit in Holding Key Rate Steady
  • It’s now one week until U.K.’s referendum on its EU membership
  • Sterling drops to lowest level versus yen in three years

The pound fell to a two-month low versus the dollar as the Bank of England reiterated warnings about the risks of leaving the European Union in its final policy meeting before the U.K. votes on its membership.

Brexit Watch: The pound, the polls, and the probability of Brexit, all in one place

Sterling weakened against most of its 16 major peers, dropping to a three-year low versus the yen. The June 23 referendum has dominated the currency market with volatility surging as polls suggested a lead for the “Leave” campaign this week. BOE officials led by Governor Mark Carney left policy unchanged and said a vote for a Brexit could damage the U.K. economy and trigger further weakness in the currency.

The prospect of Britain exiting the world’s largest trading bloc has fueled nervousness across the globe, with the Federal Reserve saying on Wednesday that the referendum was a factor in its decision to keep interest rates on hold. The Swiss National Bank kept its rates unchanged Thursday. Officials there have said the British referendum has potential to cause “enormous stress” in Europe.

While no economists forecast a change in BOE policy Thursday, markets are pricing in a 50 percent chance of an interest-rate cut before the end of the year.

Data have been offering a mixed picture of the U.K. economy. Reports this week showed inflation holding at 0.3 percent, the unemployment rate unexpectedly falling and wage growth accelerating. Sterling pared its decline Thursday as data showed May retail sales rose a more-than-predicted 0.9 percent.

‘Negative Environment’

“It’s a nervous and very negative environment for the pound,” said Niels Christensen, chief currency strategist at Nordea Bank AB in Copenhagen. “With Brexit there will be a lot of uncertainty that will hurt activity and it makes sense for the market to price in the probability of a cut.”

The pound fell 1 percent to $1.4063 as of 4:15 p.m. London time, having touched $1.4013, the lowest since April 6. The U.K. currency dropped as much as 5.2 percent to 145.40 yen, the lowest level since April 2013. Sterling was little changed at 79.22 pence per euro.

A two-week measure of pound-dollar volatility based on option prices surged to the highest level on record this week as five polls in 24 hours showed more support for leaving the EU than remaining.

U.K. government bonds rose, with benchmark 10-year yields falling as much as five basis points, or 0.05 percentage point, to a record-low 1.068 percent. The 30-year gilt yield dropped to an all-time low of 1.906 percent.

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