Pound Strategists Focused on Brexit Shrug Off Economic Optimism

  • Risk reversals show traders are the most bearish ever on pound
  • Sterling climbs in week; is still 2016's worst performer

There’s a slew of data out of the U.K. next week, some of it likely to show the economy is in good shape. Yet still currency strategists remain preoccupied with the European Union referendum in June and the potential for further losses in the pound.

Data due April 20 will show U.K. unemployment remained at a decade-low of 5.1 percent in February, while wage growth accelerated, economists surveyed by Bloomberg predict. That follows a report this week which showed faster than forecast inflation.

Still, the net cost of three-month contracts hedging against sterling losses versus the dollar climbed to 4.7 percentage points this week, the highest since Bloomberg began compiling the risk-reversals data in 2003. And while the pound climbed against the greenback in the week, it’s down against all but one of 16 peers in April, cementing its status as the worst-performing major currency of 2016.

“The market will be looking less at data and more toward Brexit risks,” said Steven Barrow, London-based head of Group-of-10 research at Standard Bank Group Ltd. Traders are watching for “a direction one way or the other as far as the polls are concerned.”

Biggest Loss

The pound climbed 0.5 percent this week to $1.4227 as of 5:07 p.m. London time on Friday, paring its decline in 2016 to 3.5 percent -- still more than any other major currency. Sterling strengthened 1.6 percent to 79.43 pence per euro, its first weekly advance in six.

A jump in the U.K.’s annual inflation rate to a higher-than-forecast 0.5 percent was overshadowed on April 12 when the International Monetary Fund cut its growth forecast for the nation and warned of “severe” damage to the world economy on a Brexit. The pound briefly erased its advance before ending the day higher.

Waning expectations of an interest-rate increase have also kept the U.K. currency weaker this year and minutes of the Bank of England’s policy decision Thursday showed officials considered the implications of Britain leaving the EU. Policy makers noted that “referendum effects were likely to make macroeconomic and financial market indicators harder to interpret over the next few months,” stoking speculation that they won’t raise borrowing costs until at least after the referendum.

With the prospect of an exit, “the data is of secondary importance,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. Even so, bad data would reinforce “pound downside risk going forward,” he said.