Pound starts stormy week on its backfoot

Sterling could be in for a wild ride as the UK’s Brexit bill goes to a vote in Parliament

Acrucial week for the pound began on a bad note as the currency reversed gains after UK factory data cast doubts on the health of the economy.

The pound could be in for a wild ride as the UK’s Brexit bill goes to a vote in Parliament and jobs and inflation due later this week complete the economic picture. Traders will be watching for signs of what kind of Brexit UK lawmakers will decide on and how Prime Minister Theresa May is faring, as well as the chances for a Bank of England rate hike this year.

Manufacturing output fell by the most in five-and-ahalf years in April and construction posted a smallerthan-expected gain. That led market pricing for an interest rate-hike by November to slip to 87 per cent, from 90 per cent before the data. Traders will next look to inflation and jobs figures, seen holding steady and crucial to the BoE’s view of the economy.

“It’s an awful set of numbers to start the week,” said Jeremy Stretch, head of Group-of-10 currency strategy at Canadian Imperial Bank of Commerce “On the basis of these numbers the week is not starting well for UK rate hawks or for sterling.”

The pound reversed earlier gains to fall 0.3 per cent to $1.3369, while UK government bond yields rose two basis points to 1.41 per cent.

Political developments are also likely to leave the pound “on the back foot,” according to Jane Foley, head of foreign-exchange strategy at Rabobank. The premium that traders demand to insure against one-week volatility in sterling rose to its highest in almost four months last Thursday, ahead of the June 12 Brexit vote in the House of Commons. Yet strategists said they were surprised it wasn’t higher.

Seeking ‘clearer path’

This could be because a lot of investors are “sidelined”, opting to wait for a clearer path before betting on the pound, said Rabobank’s Foley. This means the currency’s reaction to headlines could be more muted than expected, she said. May was to meet with backbenchers yesterday in an attempt to stave off a rebellion on the Brexit bill, while opposition Labour party lawmakers are also divided on the approach.

For Jordan Rochester, an analyst at Nomura International Plc, the longer-term story is positive for the pound, with Parliament’s intervention set to usher in a softer Brexit and positive data likely to lead to a BOE hike in August