Pound Bulls Encouraged by Signs of Post-Brexit Economic Optimism

  • Sterling rises to highest since Aug. 4 versus dollar and euro
  • Ten-year gilt yield touches highest level in four weeks

Maisonneuve: European Central Banks Running Out of Breath

Pound bulls are getting solace as evidence mounts that the resilience of the British economy since the June Brexit vote may be sustained.

Sterling rose to its highest level in four weeks against the dollar and the euro as a measure of U.K. manufacturing output unexpectedly expanded in August. Coming a day after GfK said its household confidence index last month regained almost half the ground lost in July, it’s the latest indication that the nation’s fortunes outside the European Union may not be as dire as some economists predicted, at least in the short term. The pound extended its gains as U.S. data showed a gauge of manufacturing unexpectedly contracted in August for the first time in six months.

The confidence is still far from ending sterling’s status as the worst-performing major currency since June 23. The full economic implications of the referendum result are still to become clear with the government yet to set a date for triggering the separation from the EU.

Concern that output would slow has already prompted the Bank of England to cut its key interest rate to a record and restart its asset-purchase program, and officials have said more easing may be necessary if the economy performs in line with their assumptions.

Pound ‘Floor’

“This will be a catalyst for at least putting a floor on sterling weakness in the short term,” said Viraj Patel, a foreign-exchange strategist at ING Groep NV in London. “It doesn’t mean sterling is out of the woods. We are probably going to see hard data soften in the next couple of months, which will gradually keep the downward pressure.”

The pound climbed 1.3 percent to $1.3307 as of 4:03 p.m. London time, after touching $1.3318. Sterling appreciated 1 percent to 84.11 pence per euro, after reaching the strongest level since Aug. 4.

The U.K. currency is still down about 11 percent versus the dollar since the day of the referendum. ING’s Patel sees the pound falling to $1.25 by year-end, while the median of analysts’ predictions compiled by Bloomberg is for a drop to $1.26.

IHS Markit said its Purchasing Managers’ Index rose to 53.3 last month, from a revised 48.3 in July, and above the 50 level which divides expansion from contraction. The median forecast in a Bloomberg survey of analysts was for a reading of 49. The data also served to highlight the impact of sterling’s plunge on different parts of the economy. While it was “by far the main factor” in boosting exports, according to Markit, it also fueled import costs.

U.K. government bonds fell for a second day, with benchmark 10-year gilt yields increasing four basis points, or 0.04 percentage point, to 0.68 percent. The yield earlier reached 0.72 percent, the highest since Aug. 4.

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