Pound Set for Tightest Weekly Range Since 2014 on Policy Puzzle

  • Sterling stuck versus euro and dollar as Brexit and BOE weigh
  • EUR/GBP may reach 90 pence as monetary policies diverge: BNY

Morgan Stanley’s Nell Says Brexit Is Starting to Bite

The pound headed for its smallest weekly range in more than three years versus the euro as investors waited for more certainty on the Bank of England’s next policy move and how Brexit negotiations proceed.

Sterling has been confined to a range of a little more than half a pence against Europe’s shared currency this week, its smallest since April 2014. That compares with a seven-pence swing in October, when the pound plunged in a mysterious ‘flash crash’ amid increasing investor angst after the U.K. voted to leave the European Union. Since then, the pound’s direction has been driven by calls for a hard Brexit, an inconclusive election and doubts on BOE policy.

While data this week have pointed to a slowing economy, which may weigh on the pound, increasingly hawkish rhetoric from BOE policy makers is pushing up prospects of a rate increase by year-end and acting as a floor for the currency.

  • Sterling is “treading water” as the “markets awaited fresh news regarding the Brexit negotiations,” writes Peter Rosenstreich, head of market strategy at Swissquote Bank SA
  • EUR/GBP little changed at 0.8779, has a mixed near-term outlook
    • Resistance at 0.8783, daily pivot, support 0.8757, July 3 low
  • With euro-region data looking more upbeat than those in the U.K., policy divergence between the European Central Bank and the BOE will come into play, according to Neil Mellor, senior currency strategist at BNY Mellon
  • “The recent run of data appears to shorten the odds on the revival in euro-zone inflation as envisaged by the ECB, whilst lengthening the odds on the BOE’s hawks winning over their colleagues,” he wrote in a note Thursday
    • “This in turn raises the prospects of EUR/GBP breaking free of its recent ranges and making a further assault on the 90 pence marker”
  • EU Brexit negotiator Michel Barnier signaled that the bloc’s stance on Britain’s withdrawal hasn’t softened even amid signs that the U.K.’s position has, saying the break up will carry costs and trade will no longer be “frictionless”
  • GBP/USD little changed at 1.2930, consolidates above daily ichimoku cloud
    • Resistance at 1.2959, July 4 high; support at 1.2894, July 5 low
  • Yield on 10-year gilts rises 2 bps to 1.28%
  • U.K. to auction GBP2.5b of 1.25% bonds due July 2027

— With assistance by Sejul Gokal

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