Pound Jumps Most Since Brexit Vote as May Prepares to Take Power

  • Sterling rises to highest level in a week versus dollar
  • ‘Way is clear’ for May to apply for Brexit: Commerzbank

Brexit’s Downward Pressure on the Pound

The pound climbed the most since three days before Britain’s European Union referendum as Home Secretary Theresa May prepared to take over as the U.K.’s next prime minister, removing one layer of political uncertainty.

Sterling rose to its highest level in a week versus the dollar as investors digested the implications of the new premiership on the U.K.’s negotiations with the EU over its withdrawal from the bloc. May is poised to take office by Wednesday night London time, replacing David Cameron after her only rival pulled out of the Conservative leadership contest Monday. The FTSE 100 Index of shares touched an 11-month high.

“Now the way is clear for May” to apply for an exit from the EU, said Thu Lan Nguyen, a currency strategist at Commerzbank AG in Frankfurt. “There may be hopes that the whole process of uncertainty will be shortened.”

The pound rose 1.4 percent, the most since June 20, to $1.3185 as of 4:10 p.m. in London, having earlier touched $1.3190. The U.K. currency fell to a 31-year low of $1.2798 on July 6. Sterling strengthened for a fourth day against the euro, appreciating 1.4 percent to 83.93 pence.

The pound’s recovery this week has barely dented its drop since the June 23 referendum. Sterling reached $1.50 in the aftermath of the vote, amid speculation the “Remain” camp would triumph, before falling the most on record as it became clear “Leave” would win. Speculation is also building that Bank of England policy makers will cut interest rates in an effort to spur growth amid signs the decision to leave the world’s biggest trading bloc shook confidence in the economy.

There “seems to be a notion that less political uncertainty is lowering the risk of the BOE turning more aggressive,” said Manuel Oliveri, a currency strategist at Credit Agricole SA’s corporate and investment-banking unit in London. “But this remains to be seen.”

BOE Outlook

In a testimony to parliament’s Treasury committee, BOE Governor Mark Carney defended the institution against criticism that it undermined its independence by highlighting the risks of a Brexit. The central bank will announce Thursday its first policy decision since the historic vote.

Futures pricing shows the chances of a rate cut by the BOE this week have climbed to 80 percent, compared with 11 percent on the day of the EU referendum.

U.K. government bonds fell, with benchmark 10-year gilt yields rising six basis points, or 0.06 percentage point, to 0.82 percent. The yield dropped to an all-time low of 0.708 percent Monday.

The current level of gilt yields “would suggest 30 years of stagnation,” Carney said in testimony to U.K. lawmakers. “But I would underscore that what is happening in markets, there’s a big element which is in our opinion, my opinion, a hedging of downside risk.”

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