Pound Declines as Fears of Disorderly Brexit Trigger Stockpiling

(Bloomberg) -- The pound weakened the most in three weeks on Wednesday as mounting anxiety that the U.K. may be forced to exit the European Union without a divorce deal rattled the nation’s manufacturers.

Sterling dropped for a second day after local factories reported a near-record increase in stockpiling efforts ahead of the U.K.’s exit from the EU on March 29. Over in the gilts market, investors overlooked a manufacturing gauge that rose to a six-month high in December, underscoring concerns about a disorderly departure from the single bloc.

Pound Declines as Fears of Disorderly Brexit Trigger Stockpiling

“The market is concerned that any strength is temporary and linked to front-loading of activity ahead of a possible no-deal Brexit,” said Shahab Jalinoos, global head of foreign-exchange trading strategy at Credit Suisse Group AG. “The front-loading may make the data look okay, superficially. But the details then reveal the true reason, and the market takes fright.”

The pound fell as much as 1.1 percent to $1.2596, the weakest level since Dec. 17. Jalinoos expects sterling to test $1.24 within the next three months, though “making a point forecast like that is a bit of a joke when the Brexit date is within it.”

The yield on 10-year gilts declined six basis points to 1.22 percent, though the gain in bonds was in line with a global rally.

In December, the U.K. government stepped up preparations for a no-deal withdrawal, including asking pharmaceutical companies and supermarkets to stockpile drugs and food, and putting 3,500 troops on standby.

Some analysts said the pound was getting swept up by the strength in the dollar, which was buoyed by haven flows following a weak Chinese manufacturing print and continued U.S. political turmoil.

“This is not a sterling move. Today is all about risk aversion and flight-to-safety flows,” said Ned Rumpeltin, European head of foreign-exchange strategy at TD Bank. “The Chinese data is a big part of this latest leg lower, but it also looks like the government shutdown is starting to bite.”

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