The Pound Paddles Through Brexit's Troubling Waters
The Pound suffers the brunt of the uncertainty brought by the highly-divisive Brexit, with the Bank of England adding more stress.
Raising interest rates in the coming months is not within the Central Bank's game plan, thus removing any sort of support for the Pound.
Fact of the matter is, money markets are pricing a more than 60% chance of 25-basis point rate cut come December, as it is threatened by UK's exit from the European Union without a divorce deal. Last June, the chance was only at 20%, not long after the Central Bank bucked global trends, strongly suggesting that there is a need to raise the rates moving forward.
When asked for analysis, the strategists at JP Morgan stated that the Brexit saga is again grinding its gears. The BOE's shift to neutral bias, even as it keeps the hope for normalization, will do measly to keep the Pound afloat.
As the Policy Makers move away from raising rates, JP Morgan analysts see that the lowering of their growth outlook is actually apparent come the declaration of their decision and the release of the inflation report on Thursday.
The Pound is at $1.2212 on Monday, charting a 1.4% drop. It is considered to be its weakest level since March 2017. The pair slipped 177 basis points in favor of selling sterling during the three-month risk reversals. It is the most bearish since April.
On the other hand, Gilts are seen to be headed for a third monthly rally, leading strategists to predict further gains. The yield on 10-year government bonds lost 18 basis points to 0.66 this month. Petr Krpata, the chief EMEA currency and rates strategist at ING Bank NV, says that the plot could thicken with us seeing its fall below 0.50% should Brexit see a no-deal resolution.
In an interview, Krpata makes it clear: “The more Brexit uncertainty there is, and more it spills over negatively in the growth outlook, the more downward pressure on U.K. yields there will be,” He adds that if the early elections weigh on Sterling, the UK rates and yields will go lower as it tries to paddle to safety through Brexit's troubling waters.