Pound Gets a BOE Boost But Visibility Remains Poor in Brexit Fog

(Bloomberg) -- The pound rallied the most in more than two months after the Bank of England’s Chief Economist Andy Haldane unexpectedly supported an interest-rate increase, boosting prospects of tighter policy in coming months.

Sterling snapped a three-day slide against the dollar after the U.K. central bank said only six of its policy makers supported holding rates, while three favored raising them. The vote split was 7-2 in May. Market-implied probability of a 25-basis-point rate increase in August climbed to 66 percent from around 49 percent before the central bank’s announcement.

Pound Gets a BOE Boost But Visibility Remains Poor in Brexit Fog

Still, some analysts remained skeptical the U.K. currency can sustain the advance as Brexit uncertainty persists. Prime Minister Theresa May is due to meet her peers at the European Union summit on June 28-29 and the tone of the negotiations could be a key driver for sterling in the coming days.

For “the rate-hike probability to increase further and sterling to rebound in earnest, we would need the Brexit uncertainty to abate after next week’s EU summit,” said Valentin Marinov, head of Group-of-10 currency strategy at Credit Agricole SA. “This is also the biggest downside risk to the latest bounce.”

The pound climbed 0.7 percent to $1.3262, the biggest advance since April 16, after sliding earlier to a seven-month low of $1.3102. Against the euro, it appreciated 0.3 percent to 87.59 pence. The yield on 10-year gilts was little changed at 1.29 percent, after climbing as high as 1.35 percent after the central bank’s policy announcement.

While the BOE’s Monetary Policy Committee held the bank rate at 0.5 percent, as predicted by all 61 economists in a Bloomberg survey, the 6-3 vote split took markets by surprise. Investors will look for further clues on policy prospects from Governor Mark Carney’s Mansion House speech later Thursday.

Nordea Bank AB’s global currency strategist Andreas Steno Larsen remains reluctant to price in an August rate increase, given weaker U.K. economic data and the lack of clarity on Brexit.

“The initial reaction is slightly pound-positive, but we still prefer to fade that rally,” he said. “We are still very firm in our conviction that U.K. key figures will continue south and that’s why we stick to no hike in August.”

©2018 Bloomberg L.P.