Pound Vulnerable as U.K. Prepares to Provide Brexit Plan Details

EghtesadOnline: Brexit may dominate factors influencing the pound’s fortunes again this week, with the U.K. set to lay out its position in at least three areas of negotiation with the European Union.

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21 August 2017

Uncertainty about the next round of Britain-EU talks due by month-end could weigh on sterling, which was the worst-performing Group-of-10 currency last week. The U.K. is said to be preparing to publish on Monday details on how it will treat confidential EU information obtained before Brexit and on goods placed on supply chains in the EU single market.

While more information on the government’s plans is a “favorable development,” according to Bloomberg, sterling could be stuck as “there’s a number of potholes on the road forward in negotiations,” said Lee Hardman, foreign-exchange strategist at MUFG in London. “The market is still very cautious and uncertain on what the final outcome will be.”

The pound was at $1.2860 as of 5:50 p.m. in London on Friday, having slid more than 2 percent in three weeks. Sterling was at 91.36 pence to the euro, having reached 91.50 pence earlier, its weakest level in 10 months.

Currency markets will also focus on a gathering of top central bankers in Wyoming for their annual policy summit at Jackson Hole between Aug. 24-26. Federal Reserve Chair Janet Yellen and European Central Bank President Mario Draghi are scheduled to speak.

Recent U.K. economic reports provided little support to sterling, with underlying trends in last week’s retail and labor data signaling that wages weren’t keeping up with inflation. Gross domestic product readings on Aug. 24 will be closely watched to see how recent data have fed into second-quarter growth.

Political Risk

The Citigroup Economic Surprise Index for the U.K. reached a five-year low of minus 51.9 last week. The gauge has remained under the zero mark, which denotes that economic data have been missing estimates, since May.

Strategists at HSBC Holdings Plc, including Daragh Maher, recommend selling the pound against the dollar at current levels with a target of $1.2510. A swift decline toward $1.26 “would likely rejuvenate the notion that GBP is also suffering from political risk. The probability of a hard Brexit or no deal increases the longer there is little progress in the U.K.-EU negotiations,” they wrote in a note dated Aug. 17.

“The U.K. is releasing position papers but it remains to be seen whether U.K. aspirations will be acceptable to the EU,” they wrote. “The FX market may have pushed politics into the background, but it has not disappeared.”