Pound Shows Signs of Creaking Under Weight of a No-Deal Brexit

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Pound traders are losing faith that U.K. Prime Minister Theresa May can get a Brexit deal with the European Union.

The U.K. currency fell for a third week on Friday, paring this year’s advance, highlighting the growing pessimism in markets that shrouds Britain’s exit from the EU. May suffered another Parliamentary defeat Thursday and could have just two weeks to reach a compromise with the bloc and secure domestic backing before British lawmakers could wrest control of the process from her in a vote proposed for Feb. 27.

Amid the current stalemate, the U.K. economy is showing signs of further pain, which could weigh on the currency further, according to the Canadian Imperial Bank of Commerce. After economic data disappointed last week, traders are primed for labor-market numbers in the coming week as well as any developments on Brexit with further talks between Britain and the EU planned for Monday.

Pound Shows Signs of Creaking Under Weight of a No-Deal Brexit

“Sterling remains a sell on any rallies,” said Jeremy Stretch, head of group-of-10 currency strategy at CIBC. “While politicians fiddle, macro sentiment continues to burn.”

With the pound serving as one of the main barometers for investor sentiment on Brexit and investors facing such the binary outcome of either a deal or a choatic no-deal scenarios, markets are bracing for a large swing in both directions. A two-month gauge of volatility -- covering the U.K.’s official March 29 EU exit -- held close to a one-month high Friday.

The pound traded around $1.2850 on Friday, having declined about 0.7 percent in the week earlier. Bearish sentiment on the currency has also increased since January, with two-month options at their most negative since November. The yield on the U.K. 10-year government bond was at 1.16 percent, close to its lowest level in more than eight months.

“There is no reason to be a pound optimist,” said Andreas Steno Larsen, a currency strategist at Nordea. “The best scenario for sterling right now is a prolongation, but in the Brexit soap opera, Theresa May seems to be moving closer to a no-deal.”

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