Pound Slides to This Year's Low as Brexit to Italy Risks Weigh

(Bloomberg) -- The pound is running into another crucial week as it fumbles around this year’s lowest levels against the dollar for a footing.

With the next round of Brexit talks, key U.K. economic reports and the still-unfolding Italian coalition drama set to converge in the coming days, front-end option volatility in sterling versus the U.S. currency has picked up from a one-month low reached at the start of last week. Adding to the pound’s woes were weekend newspaper reports that the Conservative Party was preparing for another election this year amid splits over Brexit.

The main thing investors are waiting for is to see whether the latest economic figures show any upturn, after a sluggish first three months of the year when the Beast from the East snowstorm swept across the country. That could push higher the odds of an interest-rate increase as early as August by the Bank of England. Nomura International Plc sees room for gains in the U.K. currency versus the euro on any positive data surprises.

“If there is a pickup in retail sales, it will suggest that the impact of the Beast from the East on first-quarter activity could have been significant,” said Jane Foley, head of currency strategy at Rabobank. “This will also be sterling-supportive since it would strengthen the view that the BOE could be primed for an August rate hike.”

Markets pared back bets for policy tightening in August after a downturn in first-quarter data amid a cold snap prompted the central bank to adopt a more cautious stance, causing strategists to turn bearish on the U.K. currency. Money-market pricing currently implies a probability of about 51 percent of an August hike, down from 62 percent before the BOE’s last policy announcement on May 10.

Brexit, Italy

“It would require significantly soft data to see the market change its mind as it’s already pretty downbeat with revisions to growth estimates lower of late,” said Jordan Rochester, a currency strategist at Nomura. “The risk for market positioning is that the data surprises higher given the revisions lower, and we’d expect the pound to outperform against low-yielders such as the euro on the back of it.”

Aside from the data, the U.K. will go into the next round of Brexit talks this week against a backdrop of euro-zone turmoil as Italy’s populist coalition pushes ahead with an agenda that’s at odds with the European Union establishment. At home, backbench members of parliament are said to be preparing for an Autumn election as they anticipate defeats on Prime Minister Theresa May’s key piece of Brexit legislation.

The pound fell 0.4 percent Monday to $1.3410, the lowest since Dec. 28. U.K. government bonds gained, extending Friday’s advance.

“We’ll be keeping a close watch over politics -- both at home and in Italy,” said Daniela Russell, head of U.K. rates strategy at HSBC Holdings Plc. “So far the rise of political uncertainty in Italy hasn’t prompted a flight to quality, but we’ll be paying close attention to the headlines.”

©2018 Bloomberg L.P.

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