Pound falls as risks from budget to ‘Brexit’ build

Bloomberg

The risks are stacking up for the pound.
Britain’s currency fell the most in three weeks versus the dollar as investors braced for a budget at which fiscal tightening is anticipated, a Bank of England statement that they’ll peruse for indications about the interest-rate path and a Federal Reserve gathering where, speculation is building, officials will signal a boost to U.S. borrowing costs later in 2016.
And in the background were renewed investor concerns that the U.K. will quit the European Union.
“This week sees a potential double fiscal and monetary hit for the pound surrounding both the budget and the Monetary Policy Committee,” said Neil Jones, London-based head of hedge-fund sales at Mizuho Bank Ltd. “I’m looking for a further selloff,” he said, adding that increased expectations of a “Brexit” and even a BOE rate cut were also weighing on sterling. The pound dropped 1 percent to $1.4154 as of 11:15 a.m. London time, set for the biggest slide since Feb. 22 and its second day of declines. It slipped 0.9 percent to 78.35 pence per euro.
U.K. government bonds rose, with the 10-year gilt yield falling four basis points, or 0.04 percentage point, to 1.51 percent. The 2 percent security due in September 2025 climbed 0.35, or 3.50 pounds per 1,000-pound face amount.
Austere Budget
In an interview with the BBC on Sunday, U.K. Chancellor of the Exchequer George Osborne warned that Wednesday’s budget statement will include more spending cuts. Interest-rate indicators also back the case for a depreciation of sterling.
While there’s little chance of the Federal Open Market Committee raising rates when it announces its latest policy decision on Wednesday, the odds of action by the December meeting stand at 78 percent, according to futures prices compiled by Bloomberg. That compares with 30 percent a month ago.
Economists in a monthly Bloomberg survey put the likelihood of a cut to the BOE’s 0.5 percent benchmark rate this year at 23 percent, up from just 10 percent in February.
Investors are “positioning into the FOMC” said Eimear Daly, a currency strategist at Standard Chartered Plc in London. With “people going long dollars and also a little bit of ‘Brexit’ fear,” the pound is falling, she said, adding that “there’s a chance the Fed will leave the door open for a June rate hike.”