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Sterling Vulnerable as May Poised to Outline Brexit Strategy

Updated on
  • Pound rises to post-EU referendum high on BOE rate rise bets
  • Further GBP strength may be limited amid political uncertainty

The pound’s rally, spurred by the Bank of England’s hawkish rhetoric, may be vulnerable to heightened sensitivity to economic data and Brexit uncertainty this week.

Sterling rounded off its biggest weekly gain in five months against the dollar Friday, reaching its highest level since just after Britain’s European Union referendum as U.K. policy makers spurred speculation of an interest-rate increase within months. While a speech by BOE Governor Mark Carney and retail-sales figures may influence pound moves earlier in the week, Prime Minister Theresa May threatens to steal the show when she unveils her approach to Brexit on Sept. 22.

The currency’s one-week implied volatility against the dollar climbed the most in the world in the five days through Friday.

The U.K. currency is the world’s best-performing major against the dollar so far in September as BOE policy makers say some withdrawal of stimulus may be needed “over the coming months.” Still, with May due to speak on Friday in Florence, Italy, about Britain’s exit talks with the EU, traders will scour her comments for clues on progress on any transitional deal and the U.K.’s separation payment, which is needed before trade can be discussed.

“The medium-term narrative for the pound will continue to be dominated by Brexit and here May’s speech in Florence will be key,” said Viraj Patel, a currency strategist at ING Groep NV in London. “If her speech doesn’t address the near-term obstacles such as the divorce bill and transitional arrangements required to move on to the next stages of the Brexit talks, then the uncertainty factor will continue to weigh on sterling in the near term.”

The pound climbed about 3 percent last week to $1.3594 on Friday. It reached $1.3616 in intraday trading, its highest level since June 24, 2016, the day after Britain’s EU vote. The currency’s one-week implied volatility rose more than three percentage points last week to 11.5 percent. Against the euro, sterling rose 1.2 percent on Friday.

Following the U.K. currency’s outperformance, BNP Paribas SA recommended fading the rally.

“The pound’s sensitivity to data should rise because the BOE’s message now has a lot of scope to shift around in response to data,” said Sam Lynton-Brown, a strategist at BNP Paribas SA in London. “Growth will surprise materially to the downside versus the BOE’s forecasts in the August Inflation Report, which will ultimately prevent them tightening anywhere near as much as they’ve signaled.”

— With assistance by Anooja Debnath

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