markets

Pound Traders Look to May, Corbyn for Vital Brexit Clarity

Updated on
  • Corbyn to outline Brexit stance Monday, May on Friday
  • Labour backing customs union would drive sterling: BNY Mellon

For pound traders seeking some degree of clarity on Brexit negotiations, speeches by Britain’s Prime Minister and the leader of the opposition will prove crucial this week.

Theresa May may have succeeded in uniting her cabinet to back an ambitious trade deal with the European Union, yet sterling gains versus the dollar are likely to remain capped by doubts on whether such demands will be accepted by her European peers. May is scheduled to outline her plan on the future relationship in a speech on March 2, after Labour leader Jeremy Corbyn sets out his party’s Brexit position on Monday.

Holding Up

Hawkish BOE helped the pound weather a week of Brexit noise and underwhelming data

Source: Bloomberg

“The upcoming speeches will be very much in focus for market participants who are still looking for more clarity on Brexit,” said Lee Hardman, a London-based currency analyst at MUFG. “I’m not sure the uncertainty is going to clear enough in the coming week. It’s likely to hold back the pound in the near term.”

The pound climbed for a third day against the dollar Monday ahead of Corbyn’s speech. It was also supported by broad weakness in the U.S. currency and after the Bank of England’s Deputy Governor Dave Ramsden signaled a change of heart on interest-rate hikes in an interview with the Sunday Times.

The pound rose 0.5 percent to $1.4046 as of 9:20 a.m. in London and strengthened 0.3 percent to 87.81 pence per euro. The yield on U.K. 10-year government bonds increased one basis point to 1.53 percent.

Stance Shift

There’s some speculation that Corbyn will formally back staying in Europe’s customs union when he speaks on Monday, which could lead to a rewrite of the U.K.’s Brexit policy. The shift in Labour’s position will “absolutely” move the pound, said Neil Mellor, a London-based currency strategist at Bank of New York Mellon Corp. “There are no two ways about it.”

The British currency has been held hostage by the opposing forces of an increasingly hawkish Bank of England on one side and underwhelming wage and growth data on the other. Added to that is the noise surrounding Brexit talks, making it tougher to take decisive calls on the currency, analysts said.

While MUFG’s Hardman remains bearish on sterling’s near-term prospects, an eventual transition deal “would give BOE more confidence to tighten policy and take cable to the mid-to-high $1.40s in the next six to 12 months,” he said.

(Writes through from first paragraph ahead of speech, adds pricing in fifth paragraph.)
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