Pound slides to this year’s low as Brexit to Italy risks weigh

London • The pound is running into another crucial week as it fumbles around this year’s lowest levels against the dollar for a footing.

With the next round of Brexit talks, key UK economic reports and the still-unfolding Italian coalition drama set to converge in the coming days, front-end option volatility in the pound versus the US currency has picked up from a one-month low reached at the start of last week. Adding to the pound’s woes were week-end newspaper reports that the Conservative Party was preparing for another election this year amid splits over Brexit.

The main thing investors are waiting for is to see whether the latest economic figures show any upturn, after a sluggish first three months of the year when the Beast from the East snowstorm swept across the country. That could push higher the odds of an interest-rate increase as early as August by the Bank of England (BoE). Nomura International plc sees room for gains in the UK currency versus the euro on any positive data surprises.

“If there is a pick-up in retail sales, it will suggest that the impact of the Beast from the East on first-quarter (1Q) activity could have been significant,” said Jane Foley, head of currency strategy at Rabobank. “This will also be pound-supportive since it would strengthen the view that the BoE could be primed for an August rate hike.”

Markets pared back bets for policy tightening in August after a down-turn in 1Q data amid a cold snap prompted the central bank to adopt a more cautious stance, causing strategists to turn bearish on the UK currency. Money-market pricing currently implies a probability of about 51% of an August hike, down from 62% before the BoE’s last policy announcement on May 10.

“It would require significantly soft data to see the market change its mind as it’s already pretty downbeat with revisions to growth estimates lower of late,” said Jordan Rochester, a currency strategist at Nomura. “The risk for market positioning is that the data surprises higher given the revisions lower, and we’d expect the pound to outperform against low-yielders such as the euro on the back of it.”

Aside from the data, the UK will go into the next round of Brexit talks this week against a backdrop of eurozone turmoil as Italy’s populist coalition pushes ahead with an agenda that’s at odds with the European Union establishment. At home, backbench members of Parliament are said to be preparing for an Autumn election as they anticipate defeats on Prime Minister Theresa May’s key piece of Brexit legislation.

The pound fell 0.4% yesterday to US$1.3410 (RM5.34), the lowest since Dec 28. UK government bonds gained, extending last Friday’s advance.

“We’ll be keeping a close watch over politics — both at home and in Italy,” said Daniela Russell, head of UK rates strategy at HSBC Holdings plc. “So far the rise of political uncertainty in Italy hasn’t prompted a flight to quality, but we’ll be paying close attention to the headlines.” — Bloomberg