Pound Fails to Shake Off Wounded Image After Week of Flash Crash

  • Concerns are growing that U.K. is headed for a hard Brexit
  • Sterling extends worst weekly slide since vote to leave EU

Is Bad Brexit Communication Increasing Market Angst?

The pound resumed its decline as investors waited for clues about the cause of last week’s flash crash and on whether Britain is truly headed for a hard Brexit.

The currency depreciated 4.2 percent last week, its worst performance since June 24, on the news that U.K. Prime Minister Theresa May planned by March to trigger Britain’s two-year withdrawal from the European Union. May will meet with foreign leaders this week in a bid to build understanding for her negotiating position ahead of this month’s EU summit, travelling to Denmark and the Netherlands on Monday.

“It’s difficult to know what new can come out of this,” said Stuart Bennett, head of Group-of-10 currency strategy at Banco Santander SA in London. “The Europeans are sticking very much to their hymn sheet, which is no informal pre-Article 50 negotiations.”

The pound dropped 0.4 percent to $1.2387 as of 4:36 p.m. London time. Sterling was little changed at 90.03 pence per euro. Last week’s slide culminated in an unexplained 6.1 percent plunge during about two minutes in Asian hours on Friday. The currency finished that day down 1.4 percent.

“The pound has been under depreciation pressure ever since the Tory party conference, in which May quite clearly signaled that the Brexit negotiations may end in a hard Brexit,” said Thu Lan Nguyen, a foreign-exchange strategist at Commerzbank AG in Frankfurt. “You could see that clearly after the flash crash we had last week. Usually, such a flash crash, particularly in such a major currency, should be corrected immediately, but it didn’t correct entirely.”

Red Lines

The Conservative Party conference in Birmingham last week saw the prime minister indicate that Britain would prioritize cracking down on immigration over keeping single market membership and EU laws.

An aide to Brexit minister David Davis provided further clarity on the government’s position when he said the U.K. had several red lines on which it wouldn’t compromise, including free movement of labor. This position has so far failed to win support from May’s European counterparts, who have accused the U.K. of trying to “cherry-pick” the parts of EU membership it wants.

JPMorgan Forecast

As the uncertainty over the form of Britain’s exit from the EU continues, JPMorgan strategists have reduced their sterling forecast. They said in a client note that the downside risks to the pound have increased, reducing their year-end forecast to $1.21 from $1.32 and 95 pence per euro from 87. The bank had upgraded its forecast only in September on better-than-expected economic data.

Meanwhile last week’s tumble and flash crash that traders speculated may have been caused by a mistaken order, or a so-called fat finger, led to companies downgrading profit forecasts. It also threatened to fan inflation. Sterling remains the world’s worst-performing major currency this year.

Gilts Buyback

U.K. government bonds extended a decline after the Bank of England bought 1.17 billion pounds of three- to seven-year debt as part of its relaunched quantitative easing program at close to prevailing market prices. The yield on 10-year gilts rose five basis points, or 0.05 percentage points, to 1.02 percent, after jumping 24 basis points in the previous four sessions. The 1.5 percent security due in July 2026 fell 0.51, or 5.10 pounds per 1,000-pound face amount, to 104.43.

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