Sterling heads for 2-month low ahead of BOE policy move

Bloomberg

The pound dropped toward a two-month low versus the dollar as traders awaited the Bank of England’s final policy meeting before the U.K. votes on its membership to the European Union.
Sterling weakened against 12 of its 16 major peers, dropping to a three-year low versus the yen. The June 23 referendum has dominated the currency market with volatility surging as polls suggested a lead for the “Leave” campaign this week. Last month BOE Governor Mark Carney said that Brexit could lead to a recession in the U.K. as the central bank downgraded its growth forecasts.
The prospect of Britain exiting the world’s largest trading bloc has fueled nervousness across the globe, with the Federal Reserve saying on Wednesday that the referendum was a factor in its decision to keep interest rates on hold. The Swiss National Bank kept its rates unchanged on Thursday. Officials there have said the British referendum has potential to cause “enormous stress” in Europe.
While no economists are forecasting a change in BOE policy on Thursday, markets are pricing in a more than 50 percent chance of an interest-rate cut before the end of the year. Separately data has been offering a mixed picture of the U.K. economy. Reports this week showed inflation holding at 0.3 percent, the unemployment rate unexpectedly falling and wage growth accelerating.

‘Negative Environment’
“It’s a nervous and very negative environment for the pound,” said Niels Christensen, chief currency strategist at Nordea Bank AB in Copenhagen. “With Brexit there will be a lot of uncertainty that will hurt activity and it makes sense for the market to price in the probability of a cut.”
The pound fell 0.3 percent to $1.4158 as of 9:10 a.m. London time. It touched $1.4091 on Tuesday, the lowest since April 14. Sterling weakened 0.4 percent to 79.60 pence per euro. The U.K. currency dropped as much as 2.8 percent to 146.40 yen, the lowest level since April 2013.
A two-week measure of pound-dollar volatility based on option prices surged to the highest level on record this week as five polls in 24 hours showed more support for leaving the EU than remaining.
U.K. government bonds rose, with the 10-year yield falling as much as three basis points, or 0.03 percentage point, to a record-low 1.089 percent. The 30-year gilt yield touched an all-time low of 1.908 percent.