Pound Declines as Trader Concern Shifts to Potential Bank Exodus

  • Banks are studying which units to relocate: Bankers’ Assn.
  • ‘Lot of negatives already in price’ of pound: CA’s Marinov

British Banks Edge Closer to Post-Brexit Exit

The pound dropped as concern escalated that banks may leave Britain should it opt for a “hard” Brexit that restricts their access to the single market.

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Sterling weakened against the dollar and the euro after Anthony Browne, chief executive officer of the British Bankers’ Association, wrote in an article published on the Guardian’s website that bankers’ “hands are quivering over the relocate button.”

An exodus of banks would challenge the economy because financial services pay more than 60 billion pounds ($73 billion) in tax each year. Sterling has dropped 18 percent versus the dollar since Britain voted in June to leave the European Union without defining its stance in negotiating the terms of departure.

“The news flow about potential departures of banks in the wake of a hard Brexit next year is not supportive of the pound,” said Valentin Marinov, head of Group-of-10 currency strategy at Credit Agricole SA’s corporate and investment-banking unit in London. “The problem with the pound is that most clients do not see any trigger for its sustained rebound. That said, the pound is cheap, as a lot of negatives are already in the price. ”

The pound dropped 0.3 percent to $1.2203 at 4:36 p.m. in London, set for its lowest close in a week. The U.K. currency rose 0.4 percent last week. It depreciated 0.2 percent to 89.20 pence per euro.

Sterling Impact

U.K. government bonds were little changed, leaving 10-year gilt yields at 1.08 percent. The price of the 1.50 percent security due July 2026 was 103.85.

The falling pound is starting to bite more widely. Microsoft Corp. said it will increase the price of its enterprise software and cloud offerings in the U.K. by as much as 22 percent to adjust to the weaker currency. Inflation increased to an annual 1 percent in September, the fastest in almost two years, and analysts forecast it will accelerate further as the impact of the plunging pound is fully accounted for.

Large speculative investors including hedge funds reduced their net short positions on sterling against the dollar, or bets the currency will fall, to 91,558 contracts last week from 95,470 contracts in the previous period, according to the Commodity Futures Trading Commission. Still, that is close to the record 97,572 contracts reached in the first week of October.

Traders will shift their attention to economic data later this week as the Office for National Statistics publishes the first report on gross domestic product encompassing the period after the Brexit vote. The economy grew 0.3 percent in the third quarter from the previous three months, when it expanded 0.7 percent, according to the median of analyst forecasts compiled by Bloomberg before the report on Oct. 27.

“There are a few signs that Brexit is starting to weigh on the U.K. economy,” said Kathleen Brooks, a research director at brokerage City Index in London. “Business investment is expected to be weak, and we expect another quarter of growth heavily reliant on consumer. Going forward, we see consumer confidence flagging once Article 50,” the EU mechanism to start the exit procedure, “is triggered at some point early in the first quarter next year.”

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