Pound Spurred by Fear of the Future Shrugs Off Good Newsby
Sterling tumbled even as U.K. economy surpassed expectations
Only ‘something significant’ would change sentiment: BTM
The pound’s reaction to this week’s report on gross domestic product provided an insight into currency traders’ attitude toward Brexit.
Sterling fell on Thursday, even after the first growth data to cover the period since the June 23 referendum came in ahead of analysts’ predictions. That underscored how the U.K. currency tends to shrug off economic good news and yet decline when concerns flare up on Britain’s exit from the European Union.
A Citigroup Inc. index showed that economic reports have generally beaten forecasts since the vote, yet the U.K. currency has tumbled 18 percent.
“Sentiment toward the pound is still very negative and it’s going to take something more significant to shift that sentiment,” said Lee Hardman, a London-based foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd.
While the pound gained about 0.2 percent after the Office for National Statistics said Thursday that the U.K. economy grew 0.5 percent in the third quarter, the move dissipated within minutes. The currency was little changed Friday, at $1.2169 as of 3:13 p.m. in London, having fallen as much as 0.4 percent earlier.
Sterling’s decline followed reports that the U.K. government had won a Brexit court case in Northern Ireland. A judge there rejected a pair of challenges to the exit process, removing at least one obstacle to Prime Minister Theresa May’s plan to begin severing ties with the EU by the end of March. The case, which can be appealed, is separate from one in a London court also challenging the exit procedure.
“The timing was perfectly clear,” said Jordan Rochester, a foreign-exchange strategist in London at Nomura Holdings Plc, referring to sterling’s drop following reports of the court decision. “It’s a different area of constitutional law, but the market is going to imply a lower probability of a ruling in favor of the claimant in the U.K. case, even though it’s completely different.”
The pound tumbled more than 4 percent in the week ended Oct. 7, when Prime Minister May’s rhetoric to the ruling Conservative Party conference brought home to investors the potentially stark choice between managing migrant numbers and securing good access to the EU’s 500 million-plus consumers.
The more dramatic reaction of U.K. government bonds to the GDP data further underscored the currency’s indifference. Yields on 10-year gilts soared, reaching the highest since the Brexit vote, as the report boosted speculation the Bank of England will refrain from further easing measures. That repricing had little effect on sterling, even though less stimulus tends to support a currency.
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The U.K. government hasn’t revealed the terms it wants after quitting the EU, leading to speculation it’s headed for a so-called hard Brexit, where control over immigration is prioritized over unfettered access to the bloc’s single market. That’s anathema to investors, who may be put off from plowing in the money Britain needs to fund its record current-account deficit.
In the latest blow to consumers from the weaker pound, Apple Inc. raised the cost of some of products in the U.K. by 20 percent. The computer-maker boosted prices overnight for existing models like the Mac Pro desktop machine while keeping its U.S. pricing unchanged.
“Markets are extremely bearish-sterling right now,” said Carl Hammer, head of currency strategy at SEB AB in Stockholm. “It has much more to do with the politics. The short-term economic outlook is never something we’ve been particularly worried about.”