Pound Seen Pressured by Weakening U.K. Data in Shadow of Brexitby
Inflation data to show price growth well below BOE’s target
Gilts post longest run of weekly gains since February
After a week of warnings about the perils of Britain exiting the European Union, economic data next week may offer traders little reason to be bullish on the pound, the developed world’s worst-performing currency of 2016.
For the period covering the June 23 referendum on EU membership, options traders are the most bearish on sterling since at least 2003. Inflation data due May 17 may support the case for the Bank of England to maintain record-low interest rates, according to economists’ forecasts predicting that consumer-price growth will remain well below the central bank’s 2 percent target. The U.K. will also release reports on employment, housing and retail sales.
“The pound’s fundamentals have deteriorated over past several months,” said Ned Rumpletin, London-based European head of currency strategy at Toronto Dominion Bank. “Even without the referendum risks, we certainly wouldn’t be bullish on the currency at this stage. People will be very sensitive if we see downward risks in next week’s numbers.”
The pound declined 0.4 percent this week to $1.4372 as of 5 p.m. London time on Friday, after dropping 1.3 percent in the five days through May 6. Sterling strengthened for the first time in three weeks versus the euro, gaining 0.6 percent to 78.60 pence.
Sterling has been hurt as signs of an economic slowdown have prompted some investors to speculate that the next move in U.K. interest rates may be lower rather than higher, even as they remain in the minority. BOE policy makers led by Governor Mark Carney said May 12 the referendum effects may account for about half of the 9 percent fall in the pound’s trade-weighted rate in the past six months.
Carney said the U.K. economy could slip into recession should Britain vote to leave the EU, while International Monetary Fund Managing Director Christine Lagarde said the risk of Brexit is an “international issue.”
Two-month options show that the premium for puts, which grant the right to sell the pound versus the dollar, over calls, which confer the right to buy, is the highest since Bloomberg started compiling the data in 2003. The difference between the so-called 25-delta risk-reversal rates was at 5.24 percentage points on Friday.
U.K. 10-year government bonds advanced for a third week, the longest run of gains since Feb. 12. Benchmark 10-year gilt yields fell four basis points, or 0.04 percentage point, to 1.38 percent. The 2 percent bond due in September 2025 rose 0.36, or 3.60 pounds per 1,000-pound face amount, to 105.43. The yield dropped to 1.36 percent on May 12, the lowest in a month.