Pound Traders Take Break From Brexit as Fiscal Policy in Focus

  • Sterling has decoupled from political news, according to ING
  • Focus turns to U.K. Chancellor’s Spring Statement on Tuesday

Pound traders are taking a break from Brexit.

Sterling barely moved last week on Brexit speeches by European Union President Donald Tusk and U.K. Chancellor Philip Hammond. This week sees Hammond in the spotlight for a different reason: U.K. fiscal policy. He will update the nation on his plans in the Spring Statement, with U.K. government bonds likely to be boosted as a result of an expected cut to borrowing.

The bar to trade sterling on developments on the U.K.’s impending separation from the EU seems to be much higher than it used to be. Sharp intraday swings on the back-and-forth between London and Brussels were the norm throughout 2016 and 2017.

“The decoupling from Brexit headlines is in effect because the risks are now real and there is a growing sense that Brexit won’t be solved anytime soon,” said Viraj Patel, a currency strategist at ING Groep NV. “So it’s natural for investors to shift focus to other short-term factors that are actually transpiring -- rather than trading of gossip or speculation that may or may not transpire.”

With little U.K. economic data this week, global factors may give direction, Patel said. Hammond will take the stage on Tuesday, though the big decisions on U.K. finances now come in the Autumn budget. For gilt investors the borrowing figure will be key, with the nation’s Debt Management Office expected to cut its issuance target to the lowest in over a decade.

Short Reprieve

Sterling may only get a short reprieve from political news. U.K. Prime Minister Theresa May’s Conservative Party begins a two-day forum in London on Friday, with senior Cabinet ministers due to speak. As the U.K. and EU continue to bicker over the terms of a Brexit deal, the pound has consolidated at around $1.38.

Then there’s an EU summit in a couple of weeks time. Investors will want to trade the facts after that meeting, as they find out whether Britain has secured a transition deal. Options traders are not expecting fireworks though. A measure of two-week pound volatility is at 8.17 percent, compared to the 11.33 percent reached before a key EU summit in December.

— With assistance by Vassilis Karamanis

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