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Pound halts gains as 'Brexit' risk outweighs quicker inflation

Wednesday, April 13, 2016 - 09:26

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The pound ended a two-day gain versus the US dollar as concern that the UK would vote to leave the European Union outweighed an earlier boost to the currency when data showed UK inflation quickened more in March than economists predicted.

[LONDON] The pound ended a two-day gain versus the US dollar as concern that the UK would vote to leave the European Union outweighed an earlier boost to the currency when data showed UK inflation quickened more in March than economists predicted.

Sterling pared an advance versus the euro as the International Monetary Fund cut its UK growth forecast and warned of "severe" damage to the world economy if Britain quits the EU.

An ICM online poll published Tuesday showed 42 per cent of voters supported the UK remaining in the single market, compared with 45 per cent who back leaving. The pound strengthened earlier after the Office for National Statistics said annual inflation quickened to a 15-month high of 0.5 per cent in March, supported by spending over the Easter holiday.

While the measure is moving closer to the central bank's target of 2 per cent, markets are still not pricing for policy makers to raise rates this year. Officials will announce their next policy decision on Thursday.

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Market voices on:

"The poll saying the leave campaign is leading is keeping the 'Brexit' risk at elevated level," said Thu Lan Nguyen, a currency strategist at Commerzbank AG in Frankfurt.

"This is reflected in generally weak sterling as well as elevated euro-pound risk reversals" which show a premium on bets that the pound will decline.

The pound was little changed at US$1.4239 as of 5:10 pm London time, after jumping as much as 0.8 per cent earlier to US$1.4348.

Sterling appreciated 0.2 per cent to 79.99 pence per euro.

The EU debate has been weighing on the pound, sending it tumbling against all of its 16 major peers this year. In a quarterly update to its World Economic Outlook, the IMF cited a potential UK exit as one of the key international risks and said it could do "severe regional and global damage by disrupting established trading relationships."

The UK currency has fallen 3.4 per cent against the US dollar this year and is 7.8 per cent weaker versus the euro. Options trading suggests sterling will extend declines against the greenback and slide more than any of its major counterparts over the next six months, risk-reversal data compiled by Bloomberg show.

"We continue to favor short positions in cable" in the run- up to the referendum, said Roberto Cobo Garcia, a strategist at Banco Bilbao Vizcaya Argentaria in Madrid, referring to bets that Britain's currency will depreciate against the US dollar.

"UK data and their impact on the BOE reaction remain overshadowed by the greater risks tied to the 'Brexit' referendum."

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