Sterling Struggles for Direction as Race to Succeed PM May Heats Up

LONDON (Reuters) -
An employee is seen walking over a mosaic of pound sterling symbols set in the floor of the front hall of the Bank of England in London. (Reuters/Luke MacGregor/Files)

The British currency remained firmly within recent ranges on Thursday in a trading slumber that analysts say shows little sign of abating until the contest to replace Prime Minister Theresa May has concluded.

Foreign exchange markets were also subdued on Thursday because traders were awaiting the European Central Bank’s monetary policy meeting later in the day.

Data showing a loss of momentum in the British economy has failed to stir the pound this week, with most of its direction coming from euro and dollar-specific drivers.

Investors are reluctant to take positions on the pound amid the Conservative party leadership contest. A euroskeptic winner could increase the risk of a no-deal Brexit, which traders say would send the pound plummeting.

Michael Gove, one of the leading contenders to replace May, said he would delay Brexit rather than rush into a no-deal exit in case it triggers an election that could propel Labour leader Jeremy Corbyn to power.

Traders are also mostly downplaying monetary policy signals, believing that Bank of England Governor Mark Carney will not raise interest rates until the form of Britain’s European Union exit is clear.

The pound was little changed at $1.2692 on Thursday, having risen from a five-month low of $1.2560 hit on Friday after the dollar weakened.

Sterling slipped 0.1% to 88.545 pence per euro, near five-month lows.

“The economic indicators coming out of the U.K. were mediocre. They didn’t move the pound. And there’s not much [the BoE governor] can do,” CMC Markets analyst David Madden said, adding that a likely catalyst for the pound would be the outcome of the leadership contest.

Sterling would slide against both the dollar and euro if Britain left the EU without a deal, according to strategists in a Reuters poll.

Median forecasts said that sterling would trade between $1.15 and $1.20 within a month of a no-deal Brexit. The median trading range forecast for the pound versus the euro was 91-96 pence in a no-deal scenario.

Kit Juckes, analyst at Societe Generale, said a no-deal Brexit would lift the euro-sterling rate above 91 pence.

“A rise to 0.93 [93 pence] is possible, a move to parity very unlikely unless by some strange magic the euro rallies while sterling falls,” he said, adding that a smooth Brexit could take euro-sterling to a range of 82-88 pence.

“A second referendum would provide a knee-jerk positive reaction were it announced, but the outcome is uncertain.”

With fewer traders betting big on the pound, expectations for price swings – measured by implied volatility – remain low.