Pound sterling rises amid stimulus hopes after worst 2-week drop since 2009

The pound has shown its first signs of recovery as markets priced in BOE governor Mark Carney's hints of an economic stimulus package

Narayanan Somasundaram
Monday 04 July 2016 10:18
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The pound has fallen against both the euro and the dollar since last week's referendum
The pound has fallen against both the euro and the dollar since last week's referendum

The pound rose, rallying from its biggest two-week drop in more than seven years after UK authorities flagged measures to mitigate the impact on the economy of the vote to leave the European Union.

Sterling strengthened against the dollar for the first time in three sessions Monday after Chancellor of the Exchequer George Osborne floated a lower corporate tax rate in an interview with the Financial Times, and before Bank of England Governor Mark Carney outlines the available macroprudential tools on Tuesday.

Chart patterns suggest the UK currency is near oversold levels, following its plunge to the lowest level in more than three decades last week.

“The latest measures announced to stimulate the UK economy — lower corporate taxes and BOE macroprudential easing — should be viewed by the market as positive and may help the pound partly rebound in the near term,” said Imre Speizer, a market strategist at Westpac Banking Corp. in Auckland.

“But ultimately, a lower pound will be required to help rebalance the UK economy.”

The pound rose 0.2 per cent to $1.3294 at 7:39 am in London, following a two-week, 7.6 per cent slide. It was the worst performer in June among 31 major currencies tracked by Bloomberg.

The yen weakened 0.1 percent to 102.65 per dollar, having gained 3.6 per cent up to the end of last week since the UK’s June 23 referendum spurred demand for the relative safety of Japanese assets.

The currency has climbed 17 per cent in 2016, its best first half of a year since 1995, making it the best performer after Brazil’s real among 16 major currencies. The euro was unchanged at $1.1136.

Osborne set a goal of lowering the corporate tax rate to 15 per cent in an effort to keep businesses investing in the UK, bringing it down to a level closer to Ireland’s 12.5 percent.

Britain currently has a 20 percent tax rate for business that’s scheduled to fall to 19 per cent in April and to 17 per cent in 2020.

Carney is set to make his third appearance in 12 days on Tuesday to address the threats facing the financial system.

He’ll outline the macroprudential tools available to support the economy, boost business lending and encourage investment — and may ease capital requirements for lenders.

Mark Carney addresses EU referendum result

Sterling’s 14-day relative-strength index was at 32, near the 30 level which some traders say is a sign the currency is oversold and poised to reverse direction.

Less Bearish

Traders cut their bets that the pound will decline against the greenback in the week to June 28, figures from the Washington-based Commodity Futures Trading Commission showed.

The difference in the number of wagers by hedge funds and other large speculators on a fall in sterling compared with an advance — so-called net shorts — was 42,711 compared with net shorts of 51,947 a week earlier, according to the data.

Australia’s dollar rose 0.2 per cent to 75.14 US cents after declining as much as 0.8 per cent as an election on Saturday left neither of the major parties with enough seats to form a government in their own right, potentially increasing risks to the country’s top AAA credit rating.

With the immediate shock of the Brexit decision now past, the next focus for investors will be economic data this week, including closely-watched U.S. non-farm payrolls due Friday. The world’s largest economy added 175,000 jobs in June compared with 38,000 in the previous month, according to median estimate in a Bloomberg survey.

The data will play a role in Fed’s interest rate deliberations. Futures traders have virtually erased bets on a Fed rate increase in 2016 and boosted the odds that the central bank will cut instead.

© 2016 Bloomberg

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