Pound Traders’ Focus Switches to BOE Through Prism of Economy

(Bloomberg) -- In the fight to understand the fate of the pound, traders will be looking at indicators of services, manufacturing and construction -- all sectors that will be vital to the post-Brexit economy.

While sterling rose versus the dollar and the euro this week, it posted its worst quarterly run against the U.S. currency since 1984, with five straight declines. A gauge of manufacturing output, due Monday, fell from a 10-month high in September, according to the median forecast of analysts in a Bloomberg survey. A separate survey will show a slowdown in the services sector, the largest part of the U.K. economy.

The PMI data will be “a forward-looking indicator of sentiment,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. “Increasingly, we’re going to be starting to look at U.K. data through the prism of what that will imply for the November Bank of England meeting and the quarterly inflation report.”

The pound rose 0.4 percent this week to $1.3015 as of 5 p.m. London time Friday. Still, it dropped 2.2 percent since June 30. Sterling gained 0.3 percent to 86.36 pence per euro. The U.K. currency fell to a 31-year low of $1.2798 on July 6 and is down 13 percent versus the dollar since the June 23 referendum on Britain’s membership of the European Union.

Swaps pricing compiled by Bloomberg indicated about a one-in-four chance of an interest-rate cut by the BOE’s December meeting, which would probably send the pound even lower.

BOE Stimulus

BOE Deputy Governor Minouche Shafik said this week that more easing will probably be needed after the “sizable economic shock” of the Brexit vote.

After cutting the key rate for the first time in seven years in August, policy makers led by Governor Mark Carney have said there’s a chance of another reduction as they assess the potential longer-term fallout from Britain’s decision to leave the EU.

“It seems likely to me that further monetary stimulus will be required at some point in order to help ensure that a slowdown in economic activity doesn’t turn into something more pernicious,” Shafik said Sept. 28 in a speech in London at the Bloomberg Markets Most Influential Summit.

Data Friday showed the U.K.’s current-account deficit widened in the second quarter as the trade gap hit a 2 1/2-year high, while the economy expanded faster than estimated.

Next week’s PMI numbers are “likely to confirm that so far markets or corporates and consumers have not been impacted as such” by Britain’s decision to leave the European Union, said Thu Lan Nguyen, a foreign-exchange strategist at Commerzbank AG in Frankfurt.

“Initially they probably thought ‘nothing is happening short term, so we can stick to our initial investment plans’ but how long are they going to drag this?” she said. “If the economy is now moving sideways or accelerating even after the Brexit vote, this will be significant.”

To contact the reporter on this story: Charlotte Ryan in London at cryan147@bloomberg.net. To contact the editors responsible for this story: David Goodman at dgoodman28@bloomberg.net, Keith Jenkins, Paul Armstrong