Pound’s Weekly Drop Is Most Since July on Brexit, BOE OutlooksBy
Sterling damped by unpredictable Brexit negotiations: Chapman
Analysts in Bloomberg survey see pound at $1.28 by end-2016
The pound fell the most this week since early July amid speculation that potentially painful Brexit negotiations will prompt the Bank of England to ease monetary policy further.
Sterling dropped against 15 of its 16 major peers on Friday as the Telegraph newspaper cited five unidentified senior EU officials saying that Britain will face a “bureaucratic nightmare” in the talks, and that “reality” even may persuade it to not follow through with the voter-approved exit. While the BOE’s Monetary Policy Committee members voted unanimously to keep its key interest rate and asset-purchase target unchanged on Thursday, they signaled further easing cannot be ruled out.
“Some of the political discontent we’ve seen recently has revived the concerns around what the Brexit will really look like,” said Chris Chapman, a London-based trader at Manulife Asset Management. “We still believe the pound will go lower. The BOE is acknowledging the recent recovery in economic indicators but also remains cautious as it considers the longer-term impacts of Brexit uncertainty.”
The pound fell 1.2 percent to $1.3080 as of 4:22 p.m. London time, down 1.4 percent in the week. That’s the biggest decline since July 8. It weakened 0.5 percent to 85.33 pence per euro, set for a 0.8 percent depreciation from Sept. 9.
Sterling touched a 31-year low of $1.2798 on July 6 and is still down 11 percent versus the dollar since the June 23 referendum. The median analyst forecast is for the pound to fall to $1.28 by year-end.
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Options pricing suggested further downside for sterling is limited in the near term. The premium on three-month contracts to sell the pound versus the dollar, over those to buy, has narrowed since the referendum to 0.95 percentage point, close to the lowest since January. The gap widened to 6.39 percentage point in the run-up to the vote, the most on a closing-price basis since Bloomberg began compiling the risk-reversals data in 2003.
“We believe concerns regarding the economic implications of Brexit vote were exaggerated, meaning sterling to perform satisfactorily in coming months,” said Carl Hammer, head of currency strategy at SEB AB in Stockholm. “However, we are more skeptical toward further outperformance in 2017 as real negotiations with the EU start.”
U.K. government bonds advanced. Benchmark 10-year gilt yields dropped two basis points, or 0.02 percentage point, to 0.87 percent. The 1.5 percent security due in July 2026 rose 0.195, or 1.95 pounds per 1,000-pound face amount, to 105.92.
The yield difference between two- and 30-year government securities held close to a two-month high, with longer-dated bonds having underperformed as investors prepared to buy new 30-year gilts to be sold next week.
Gilts have earned 13.5 percent this year, beating returns of 4.4 by Treasuries and 5.3 percent in German bonds, according to Bloomberg World Bond Indexes.