Pound Sluggish on BOE Policy Doubts, Looming Risk in Referendum

  • Sterling struggles to hold onto gains made after U.K. data
  • Currency still `vulnerable' to economic outlook: Rabobank

The pound’s first day of trading in 2016 highlighted the challenge traders face.

Sterling swayed between gains and losses after economic data failed to lend clarity to the future monetary-policy path of the Bank of England. Investors aren’t pricing in an increase in interest rates until 2017, even after rates were raised in the U.S. last month. The British currency earlier climbed from its weakest level in more than eight months versus the dollar, supported by a report that showed mortgage lending in the U.K. grew in November by the most since 2008, only to reverse and touch new lows during the day.

Separate data indicated that manufacturing growth unexpectedly slowed last month. The pound rose against the euro after earlier touching its lowest since October. A promised vote on Britain’s future in the European Union also weighed on the currency’s longer-term prospects.

“The economic data has been quite mixed,” said Jane Foley, a senior currency strategist at Rabobank International in London. She said the pound found support on Monday as “the market is probably a little bit too short, and some shorts may been have covered. The pound is still vulnerable going into 2016 both on concerns that the BOE may delay an interest-rate hike for a while and also on concerns about the EU referendum.”

To be short on a currency is to bet on its decline, and ending that bet is sometimes called covering.

The pound fell 0.4 percent from Dec. 31 to $1.4682 as of the 5 p.m. London close. It had earlier reached $1.4663, its lowest since April. Sterling strengthened 0.2 percent to 73.57 pence per euro, after earlier touching 74.24 pence, its weakest since October.

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 2017. In contrast, markets are signaling a more-than-50 percent chance of an additional increase in U.S. rates by the Federal Reserve by its April meeting.

Ten-year gilt yields fell eight basis points, or 0.08 percentage point, to 1.88 percent. The 2 percent security due September 2025 rose 0.74, or 7.40 pounds per 1,000-pound face amount, to 101.09. The nation’s Debt Management Office is scheduled to auction 3 billion pounds of bonds maturing in 2025 on Tuesday.

Before it's here, it's on the Bloomberg Terminal.