Pound’s Drop on Carney Adds to Slide That May Soften Brexit Blow

Does Carney's Brexit Warning Justify the Remedy?
  • Easing may be neccessary within months, Carney says Thursday
  • Carmaker Aston Martin said pound drop ‘good’ in short term

Mark Carney has halted the pound’s recovery in its tracks.

The U.K. currency extended its decline versus the euro into a second day Friday, a day after Bank of England Governor said that officials may need to loosen monetary policy as they try to contain the fallout from Britain’s decision to quit the European Union. His remarks also halted a two-day rally in sterling versus the dollar and, though the pound was little changed Friday, it’s still more than 10 percent weaker against the greenback since polls closed on June 23.

While that’s a sign of a lack of confidence in the U.K.’s post-vote economy, a weaker currency may help cushion the effect of Brexit. Central-bank action, designed to further insulate the U.K., may be necessary within months, Carney said in his second televised address since the country voted to leave the trading and political bloc.

Bloomberg.com: Brexit Fallout indicators

“The comments clearly signal that the Bank of England has decided to loosen monetary policy to support growth,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “And it will look through a temporary period of higher inflation resulting from a sharp decline in the pound. BOE easing will reinforce the weakening trend for the pound.”

The pound rose 0.1 percent to $1.3326 as of 3:10 p.m. London time, after dropping 0.9 percent on Thursday. It tumbled the most on record on June 24, hours after the Brexit results, and on June 27 fell to $1.3121, the lowest since 1985. Sterling slipped 0.3 percent to 83.68 pence per euro, adding to a 0.7 percent slide the previous day.

Cameron Out

The currency had already fallen after the June 23 referendum plunged the country into political and market turmoil, leading to the resignation of Prime Minister David Cameron.

The Conservatives are in the process of choosing a leader who, as the next premier, will have the task of negotiating the terms of Brexit. Sterling pared an earlier decline versus the greenback after one of the contenders, government minister Michael Gove, said he didn’t expect the exit trigger to be pulled this year.

The pound’s slide does have some benefit for the U.K. economy because it makes exports cheaper to buy with other currencies. It’s already helped the FTSE 100 Index recover from its post-Brexit slump, with the gauge headed for its highest close since August.

Motoring Ahead

“In terms of our export perspective in the short-term that’s only good for us,” Mark Wilson, chief financial officer of U.K.-based luxury carmaker Aston Martin Lagonda Ltd., said in an interview this week, referring to the pound’s decline. In the long-term, Brexit “doesn’t affect what we intend to do.”

Asked about the initial drop in sterling after the referendum result, Carney said big moves were to be expected and there was a need for the currency to “find a new level.”

“While the currency was moving, it wasn’t moving because of market technicals, it was moving because of opinions,” he said. “And when the market is functioning, you don’t want to get in the way of it.”

U.K. government bonds advanced Friday, pushing the yield on some non-benchmark gilts below zero for the first time, as futures traders drove up the odds of a rate cut by the BOE’s September meeting to 82 percent, from 59 percent on Wednesday. The benchmark 10-year gilt yield dropped to a record-low 0.776 percent. The nation’s two-year gilt yield touched 0.05 percent, the lowest since 2012.

“As long as the markets believe in the all-mighty power of the central banks, it works,” said Benno Galliker, a trader at Luzerner Kantonalbank AG in Lucerne, Switzerland. “For the FTSE 100 it’s a bonanza. They sell most of their goods in the euro area and with this weak pound, it’s great for them.”

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