Pound in Best Week Since 2009 as Brexit Relief Rally Intensifies

  • Sterling rises for sixth day, longest run since March
  • BOE policy, economy don’t justify pound weakness: UBS Wealth

How the BOE and Brexit Are Impacting the Pound

The pound posted its best week since 2009 as a flurry of news offered relief for the currency.

Sterling climbed this week on speculation a High Court ruling will delay or soften the terms of the nation’s exit from the European Union and it received a further boost when the Bank of England said it’s no longer expecting to cut interest rates again this year. The BOE also raised its forecasts for both consumer-price increases and growth. Options pricing indicates that traders have become less bearish on the pound in the short term.

Data that beat analyst forecasts helped lend support to the pound. A report Thursday showed the U.K. services industry expanded for a third month in October, emphasizing the economy’s resilience since the June 23 Brexit vote. Still, sterling’s rally this week barely dented its 16 percent slide since the referendum.

Based on economic data, “sterling is more likely to rise than fall,” Constantin Bolz, a Zurich-based foreign-exchange strategist at UBS Group AG’s wealth-management unit, wrote in a note to clients dated Nov. 3. “Given stronger growth and higher inflation, the case for further easing would be difficult to justify.”

The pound rose 0.7 percent to $1.2545 as of 3:50 p.m. in London, and earlier reached $1.2548, the highest since Oct. 7. The U.K. currency’s six-day winning streak, its longest since March, pushed its weekly gain to 3 percent, the biggest since October 2009. Sterling strengthened for a third day versus the euro, gaining 0.6 percent to 88.60 pence.

Stronger services PMI data are “another sign that the economy is not suffering as much as previously feared,” UBS’s Bolz said. “We believe that the economy, as well as Bank of England monetary policy, do not justify current sterling weakness.” Politics remains “the most volatile component in the equation,” he said.

Court Ruling

A panel of judges ruled Thursday that the government needs parliament’s approval to start negotiations to exit the EU. The decision came before the BOE said its nine-member Monetary Policy Committee voted unanimously to keep interest rates and the asset-purchase target unchanged, while indicating that accelerating inflation may even warrant tightening policy at some point.

One-month options show that the premium for puts, which grant the right to sell the pound versus the dollar, over calls, which confer the right to buy, fell for an eighth day, according to 25-delta risk-reversals data compiled by Bloomberg. The difference was 0.46 percentage point Friday, the lowest since Sept. 14.

“We have $1.26 in the near term as the place that markets will take a rest,” Francesco Garzarelli, London-based co-head of global macro and markets research at Goldman Sachs Group Inc., said in an interview on Bloomberg Television with Guy Johnson, referring to sterling’s level versus the dollar. “Because there’s a lot of uncertainty, general elections may be coming up in 2017, the market will want to see that unfolding before really taking a view.”

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