Pound Tumbles Below $1.30 as Traders Await More Brexit Bad News

Updated on
  • Sterling falls for fifth day in longest streak since May
  • BOE’s McCafferty warns that further easing may be required

Stubbs: Sterling Goes Lower on Hard Data of Slowdown

The pound fell below $1.30 for the first time in almost a month as investors prepared for data that will give further clues on the state of the U.K. economy in the wake of the decision to quit the European Union.

Britain’s currency dropped for a fifth day and ceded ground to all 16 major peers amid speculation the reports, due next week, will show an economy reeling from the Brexit vote on June 23. Sterling is suffering its longest losing streak since May after the Bank of England cut interest rates for the first time since 2009 in its Aug. 4 policy announcement, while exceeding economists’ expectations on quantitative easing.

The pound was depressed further after BOE policy maker Ian McCafferty warned in The Times newspaper on Tuesday that further rate reductions and QE may be required. That’s all the more surprising because as recently as January, he was voting to raise rates.

“Investors are gradually coming to realize that the Bank of England is going to cut this year -- that’s going to be negative for the currency," said Charles St-Arnaud, a senior economist at Nomura International Plc in London. "That should have been already priced in. So the question becomes, how much more negative can we get for the pound without any more bad news?”

The pound fell 0.3 percent to $1.3003 as of 5 p.m. in New York, slipping below $1.30 for the first time since July 12. Sterling has dropped 1.7 percent this month, the worst performance among major currencies.

Diverging Fortunes

The Bloomberg Dollar Spot Index fell 0.3 percent after four days of gains driven by the Federal Reserve being the only major central bank considering tighter monetary policy. The chance of a U.S. rate increase this year has climbed above 40 percent, futures prices compiled by Bloomberg suggest. The prospect was buoyed by Friday’s stronger-than-predicted U.S. payrolls report.

U.K. inflation and employment figures for July, key indicators for how Britain’s economy is faring post-Brexit, will follow data that have already shown contractions in services and construction as well as consumer confidence.

McCafferty opted to increase borrowing costs in the six BOE meetings from August 2015. While he was in favor of the rate cut at the Monetary Policy Committee gathering last week, he was one of three officials to vote against more QE.

Alongside a quarter-point rate cut, at the latest meeting the BOE announced it would increase its gilt-purchase program by 60 billion pounds ($78 billion) to 435 billion pounds to offset the impact of the referendum result. The additional purchases started Monday and are due to be completed in six months.

“We could see some short-term weakness in the pound,” said Janu Chan, a senior economist in Sydney at St. George Bank Ltd., which nevertheless predicts a rally to $1.33 by year-end. “It was an extensive stimulus program that the BOE announced. The economy has been hit in the short-term, and could face a minor recession.”

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— With assistance by Kevin Buckland, and Narayanan Somasundaram

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