Pound Slides as BOE Hawk Turns Dovish on Brexit-Induced Slowdown
Pound’s woes multiplied on signs even a smooth Brexit may not be enough to prevent Bank of England from lowering interest rates.
(Bloomberg) --
The pound’s woes multiplied on signs that even a smooth Brexit may not be enough to prevent the Bank of England from lowering interest rates.
Sterling fell to its lowest in nearly three weeks and U.K. government bonds rallied as Bank of England policy maker Michael Saunders said Brexit uncertainties are likely to keep depressing growth, even if the departure from the European Union is smooth, delayed or canceled. Money markets now price a quarter-point rate cut in August 2020, from December 2020 on Thursday.
“Even the more hawkish MPC members are starting to talk about the potential need for rate cuts,” said MUFG analyst Lee Hardman. “It is a further negative for the pound but Brexit developments should remain key driver of performance.”
The U.K. currency is headed for its worst week since the start of August as the political turmoil in Westminster deepens and the European Union loses faith a deal can be reached by the Oct. 31 Brexit deadline. The central bank had previously been expected to stay on hold through any Brexit delay but Saunders’ comments suggest a reversal in thinking, adding to the negative outlook for the currency.
NOTE: Pound Traders Are Most Concerned About Risks Looming in December
The pound fell as much as 0.5% to $1.2271, the lowest since Sept. 9. The yield on U.K. 10-year government bonds fell as much as five basis points to 0.47%, the lowest since Sept. 4. The pound’s drop gave the FTSE 100 share index a boost, with the gauge up around 1.1% compared to a 0.5% rise for the Stoxx 600 gauge.
Mounting Negativity
Saunders’ shift in tone brings him in line with the markets, with traders already pricing the central bank’s next move as a cut. With just over a month until the Brexit deadline, it’s still unclear whether the U.K. is headed for a last-minute deal, an extension or a chaotic exit.
Some Brexit-weary pound traders are getting ahead of the game by looking beyond the scheduled departure date from the EU to insulate themselves from currency risk. The cost of insuring against undue swings in the pound is at its highest over the three-month horizon, suggesting traders envision a delay followed by a general election and the new government outlining its plans at the December EU summit.
“Sterling continues to be the Group-of-10 laggard,” said CIBC analyst Jeremy Stretch. “Saunders arguing that policy easing cuts may be needed merely adds to pound negativity.”
--With assistance from Anooja Debnath, Michael Hunter, James Hirai and Ven Ram.
To contact the reporter on this story: Charlotte Ryan in London at cryan147@bloomberg.net
To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net, William Shaw, Neil Chatterjee
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