Pound Rally's Progress to Hinge on Clearing Brexit Bill Hurdles

  • Positive news could push currency past $1.34: Mizuho
  • ‘Far too little’ political risk priced in U.K. assets: BlueBay
Photographer: Jason Alden/Bloomberg

The endurance of the pound’s three-week rally against the dollar depends on whether ongoing Brexit negotiations can clear the way to discuss trade.

With the week being relatively light on key U.K. economic data, likely discussions between British and European Union officials could dictate sterling’s moves. The clock is ticking after the bloc’s President Donald Tusk said a financial offer from the U.K. on the exit bill has to come by early next month to win approval to move talks on to trade at a Dec. 14-15 summit. 

The pound could have a “solid rally” to move through $1.34 if agreement is reached with the EU to discuss the future relationship, according to Mizuho Bank Ltd’s head of hedge fund sales Neil Jones. Yet it could fall to $1.28 if the news flow suggests a December deal is not achievable, he said.

“What I would want to see for a higher pound is some increased flexibility from the EU on a trade deal, but I have doubts frankly,” Jones said. “Hence it’s likely the pound sees an initial rally but runs out of steam as the market attention returns to the EU response.”

That skepticism is shared by BlueBay Asset Management’s Mark Dowding, especially as the U.K. government’s own stability and its leader Prime Minister Theresa May’s political future remain in doubt.

There’s “a heightened risk that this summit could see a breakdown in talks and a lurch toward the fear of a ‘hard’ Brexit, which could easily put Prime Minister May’s position in jeopardy,” said Dowding, a senior portfolio manager at BlueBay. “We continue to see far too little inflation risk premium and political risk premium in U.K. assets.”

Patchy Data

The pound traded around $1.33 in London on Friday. The currency has rallied about 2 percent in the past three weeks, partly on the back of a weaker dollar.

Traders will also be watching the Purchasing Managers’ Index for U.K. manufacturing, due on Nov. 1. Britain’s recent economic data has been patchy. While industrial production rose more than forecast and output increased across manufacturing sectors, construction shrunk and consumer confidence slipped to levels last seen shortly after the Brexit vote. All this has Toronto-Dominion Bank’s Mark McCormick betting on declines in sterling.

“For cable, it appears the market has priced in a lot of the good news while top-tier data remain inconsistent,” said McCormick, North American head of currency strategy at TD Bank. He said the bank was entering a short sterling position versus the New Zealand dollar in the model portfolio at around $1.9305, targeting moves to $1.8696, with a stop loss at $1.9620.

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