February 1, 2019 / 9:28 AM / 7 months ago

Pound set for biggest weekly drop in seven weeks after weak data

LONDON (Reuters) - Sterling slid on Friday, putting it on track for its biggest weekly loss in seven weeks, after survey data highlighted the degree of uncertainty sweeping British manufacturers as the country heads towards Brexit in less than two months.

FILE PHOTO: Pound Sterling notes and change are seen inside a cash resgister in a coffee shop in Manchester, Britain, Septem,ber 21, 2018. REUTERS/Phil Noble

While foreign exchange markets have broadly reduced the possibility of Britain crashing out of the European Union without a trade deal in place at the end of March, derivative markets are predicting more currency volatility in the coming days.

Investors have ramped up purchases of two-week options taking into account the dates when British lawmakers meet while one-month risk reversals, a ratio of puts to calls on a currency, have shown increasing signs of caution for the pound. For a related buzz item, see

Prime Minister Theresa May aims to get parliament’s approval for a revised deal on Feb. 13. If that fails, parliament will vote on next steps on Feb. 14.

(Graphic: Two-week vs one-week Implied GBP vol, tmsnrt.rs/2t3l7pW)

Manufacturers scrambled to stockpile goods in January at the fastest rate since records began in the early 1990s, the IHS Markit/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) showed.

The survey also showed deepening pessimism, with British factory output growing by the smallest amount since July 2016.

“The PMI data has taken the shine off sterling after last month’s rally and there is a bit of profit taking at these levels,” said Lee Hardman, a currency strategist at MUFG in London.

The pound fell more than half a percent against the dollar after the data, briefly piercing a 200-day moving average of $1.3045. It trimmed some losses to trade down 0.3 percent at $1.3074.

For the week, it is down nearly a percent, breaking a six weeks of consecutive gains.

Against the euro, the pound weakened 0.4 percent to 87.62 pence.

A close of the pound below the 200-day average against the dollar would open the door for more potential losses as investors try to figure out whether May’s Conservatives rallying around her has increased the chances of her securing concessions from the EU or has pushed Britain towards further deadlock and uncertainty.

The currency has strengthened 3 percent against the dollar and 2.8 percent versus the euro in January as currency traders slashed the odds on a no-deal Brexit.

British foreign minister Jeremy Hunt said on Thursday the UK government would take a few days to formulate new proposals for the Irish border. He also hinted an extension to the Brexit process, beyond exit day on March 29, might be required.

Reporting by Saikat Chatterjee; Editing by Janet Lawrence and Hugh Lawson

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