Pound Finding Respite as Economy Defies Post-Brexit Doomsayers

Despite Pound Advance, JPMorgan Warns of U.K. Recession
  • Inflation, unemployment reports beat forecasts this week
  • Market was short sterling and ‘got squeezed’: NAB’s Friend

The pound headed for a weekly advance after a series of reports showed the U.K. economy is remaining resilient in the wake of the vote to quit the European Union.

Sterling climbed against all but three of its 16 major peers after July inflation, import prices and jobless claims beat forecasts, suggesting that -- at least for now -- the U.K. is shrugging off economists’ warnings of a post-Brexit slowdown. While surveys after the June 23 vote had already signaled contractions in various sectors, this week’s figures were the first concrete evidence of the referendum’s economic impact.

“The market is short” the pound, “so we did get a little bit squeezed,” said Gavin Friend, a strategist at National Australia Bank Ltd. in London, referring to bets the currency would weaken. “We do have lower views for sterling going further out.”

The pound fell 0.8 percent to $1.3064 as of 1:35 p.m. in London, poised for a 1.2 percent weekly gain -- only its third since the referendum. Sterling weakened 0.4 percent to 86.58 pence per euro. It touched a three-year low of 87.25 pence versus its European counterpart on Aug. 16.

BOE Expectations

The better-than-expected data provided some respite for the pound, which has been one of the most obvious casualties of Brexit. The currency had its worst-ever day versus the dollar when the result became clear, while losses deepened after the Bank of England’s decision this month to cut interest rates by a quarter-point and boost its stimulus plan.

Despite the more optimistic picture of the economy, some investors expect that further action by the BOE to boost growth will cap long-term pound strength. Futures pricing shows the chance of a rate cut by year-end at 36 percent.

“We expect weaker economic growth in the second half of the year,” NAB’s Friend said, predicting another 15 basis-point cut.

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