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04/12/2016

Sterling subdued by Brexit uncertainty and UK rate outlook

Trade & Society

Sterling subdued by Brexit uncertainty and UK rate outlook

David Cameron

[DFID/Flickr]

Sterling traded below a recent one-month high against the dollar on Monday (8 February), as uncertainty about Britain’s place in the European Union and diminishing rate hike prospects kept investors cautious.

Sterling was trading at $1.4496, off the one-month high of $1.4672 it hit last Thursday (4 February) after Bank of England chief Mark Carney quashed talk that interest rates could be cut in the coming months, with lower stocks also weighing on sentiment.

The pound was lower against the euro. The single currency, often preferred during times of financial market stress, was up 0.2 percent at 77.085 pence, not far from a one-year high of 77.56 pence struck on 20 January.

Data from the Commodity Futures Trading Commission released on Friday showed speculators had trimmed their net bets against the pound last week. They had been aggressively adding to their unfavourable bets since the start of the year, pushing the pound to a seven-year low in late January.

>>Read: Sorrell: UK business should speak up, as ‘Brexit would be damaging’

A rough week for the dollar helped sterling stage a recovery last week. The US currency lost more than 3 percent against a basket of currencies before a good US jobs report lifted it from lows.

“After benefiting from dollar weakness across the currency markets last week, it looks like the correction in sterling/dollar might have concluded,” said Jameel Ahmad, chief market analyst at FXTM.

“There are still concerns about slowing economic momentum in the United Kingdom, while ongoing uncertainty over whether there will be a Brexit referendum to vote on UK membership of the EU should continue to haunt investors.”

>>Read: House of Lords warned EU will punish UK if it votes for Brexit

A YouGov poll released late last week showed those campaigning for Britain to leave the European Union had taken a nine-point lead. The poll showed 45 percent of Britons would vote to leave the bloc compared with the 36 percent who want to remain.

Nineteen percent said they did not know or would not vote. Markets and punters are betting that the referendum is likely to be held in June.

Traders expect uncertainty stemming from the referendum to keep the pound choppy in the coming months and possibly force the central bank to keep rates lower for longer. Most economists think Brexit would hurt growth in the short-run — Citi predicts a 4 percent hit over three years.

“The Brexit debate has gained momentum, with PM (David) Cameron on the back-foot, as indicated by recent survey data,” Morgan Stanley strategists said in a note recommending investors to sell the pound against the safe-haven yen.

>>Read: Hill predicts UK will say ‘no’ to Brexit

“BoE minutes and the quarterly reflation report leave the impression that there is no rush hiking rates. Finally, mixed economic signals suggest that the fiscal tightening works now in a pro-cyclical way.”

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