Pound’s Best Run Since Brexit Vote Faces Data Hurdles Next Week

(Bloomberg) -- The pound is set for a litmus test next week with the release of housing data and purchasing managers’ surveys that might crimp the currency’s best run since May versus the dollar.

Sterling climbed for the second week versus the U.S. currency, its first back-to-back gain since before the U.K. voted to leave the European Union in June, as credit and export-orders data this week proved more resilient than analysts had envisaged. Further upside surprises in economic data may extend sterling’s advance, after it strengthened this week against all of its 16 major peers.

Pound’s Best Run Since Brexit Vote Faces Data Hurdles Next Week

While analyst forecasts suggest reports will show consumer confidence improved and manufacturing output contracted at a slower pace in August than in previous month, housing data will indicate further signs of weakness, with mortgage approvals forecast to fall to their lowest since March 2015.

“I’m still cautious into next week,” said Roberto Mialich, a senior foreign-exchange strategist at UniCredit SpA in Milan. “Despite some resilient data, we still expect more deterioration in the U.K. economy. That in our view will become more evident in the coming months.”

The pound climbed 0.7 percent this week to $1.3164 as of 5 p.m. in London, extending last week’s 1.2 percent gain. Sterling appreciated for the first time in six weeks versus the euro, climbing 1.5 percent to 85.35 pence.

“We still see more sterling weakness,” UniCredit’s Mialich said. The U.K. currency will fall to $1.20 and weaken to 93 pence per euro by year-end, he predicted.

Brexit Aftermath

Britain’s economy has so far shown signs of withstanding the aftermath of the Brexit vote, with fears of a recession slowly ebbing. Citigroup Inc.’s U.K. Economic Surprise Index has remained above zero since mid-June, which signals that data releases have been surpassing market forecasts. It reached its highest level since September 2013 on Aug. 18.

Options pricing signals a 28 percent chance that the Bank of England will cut interest rates by December. That’s down from 66 percent on June 24, the day the results of Britain’s decision to leave the EU became clear.

“We think the market is a bit too pessimistic” on U.K. data, said Carl Hammer, head of foreign-exchange strategy at SEB AB in Stockholm. “There is still some potential for recovery in the near term.” In the longer run Hammer foresees more BOE stimulus that will debase the pound and said he “would still look to sell a correction higher” in sterling.