Pound Has Worst Quarter Since 2009 as `Brexit' Risk Takes Hold

  • Trade-weighted measure of sterling has dropped 5.4% this year
  • BOE slow to raise rates even if inflation picks up: Rabobank

U.K. Conservative Party Division Over ‘Brexit’

The pound is heading for its worst quarter since 2009 as traders brace for the U.K.’s referendum on membership to the European Union, preparing for the risk that investment inflows will dwindle.

A trade-weighted measure of sterling has dropped 5.4 percent this year amid concern that Britain will vote to leave the world’s biggest single market on June 23, in a so-called Brexit. Options markets indicate traders see the pound falling further against all of its Group-of-10 counterparts in the next three months. Even as the Bank of England damped speculation that officials would cut interest rates, forward contracts project no increase in 2016, and that’s weighing on the currency.

While the economic benefits of a drop in the pound, such as faster inflation, could help the central bank’s case that it’s more likely to raise than cut rates, the reason for the decline will concern policy makers, according to Jane Foley, senior foreign-exchange strategist at Rabobank International in London.

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“Political uncertainty has the capacity to knock sterling hard,” Foley said. “An acceleration in inflation does not automatically mean that the Bank of England are going to hike interest rates sooner than we have been thinking a couple of months ago. If we see growth faltering on back of political uncertainty then they may not be in any rush to hike rates.”

The pound was little changed at $1.4269 as of 4:17 p.m. London time, having dropped 3.2 percent this year. It was 78.44 pence per euro. On a trade-weighted basis, sterling is set for the biggest quarterly decline since it dropped 6.4 percent in September 2009, according to a Deutsche Bank measure. The gauge rose 1.8 percent in 2015.

BOE Support

The BOE’s Financial Policy Committee said officials were ready to support financial stability amid the risk of ‘Brexit,’ which was at the top of its list of near-term domestic threats. Uncertainty could lead to a further depreciation of the pound, as well as affect the cost and availability of financing for U.K. borrowers, officials said in a statement of its March 23 meeting, released on Tuesday.

“I don’t think we can yet rule out further falls if we saw a ‘Brexit,’” Foley said of the pound. “If we don’t see ‘Brexit’ we’re going to rally.”

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