UK braces for another pounding from Brexit talks

Deutsche Bank, Citi among major banks forecasting more falls

LONDON, March 14, (RTRS): After eight months of discounting a plethora of UK political risks, sterling’s relaxed reaction to the prospect of the launch of Brexit talks and a new Scottish independence referendum may be understandable, but the worst may not be over yet.

Declared the official opposition to the government’s drive for a “hard Brexit” when it sank last year, the pound barely moved on Monday as the Scotland’s first minister demanded a new vote and the government saw off the last pieces of parliamentary opposition.

That stability may have been some measure of how far sterling has fallen — more than 20 percent in a year — and how cheap it now seems to big financial investors.

But for the past three weeks it has looked more like the calm before a gathering market storm that may be launched by a combination of a weakening economy and an EU summit in early April that will establish ground rules for the talks.

Several of the currency world’s top 10 banks, who were more cautious on the pound at the end of last year, have been aggressive again in the past fortnight in advocating more declines. Sterling has been the worst performer against the dollar among the major developed-world currencies as a result.

Net “short” bets against the pound on the regulated US futures market took their biggest jump in six months last week, a fifth rise in a row taking them to the highest since November.

They remain short of the record highs reached after a “flash crash” last October, suggesting there may be more room to fall. An alternative measure of investor movements run by Citi, the world’s biggest currency trader, says nothing in the past month’s flows suggests there is a barrier to more selling.

“The focus on sterling has definitely reduced significantly this year and that does suggest the moves down may be slower and more of a grind,” said Josh O’Byrne, a strategist on the G10 group of major currencies with the US bank.

“But a move below $1.20 by the end of the year wouldn’t surprise us at all, and you probably have a bit more room, towards $1.15. Positioning isn’t too heavy and the politics may represent a bit of a catalyst for the wider economic picture.”

The pound sank after the Brexit vote last June largely on the assumption that consumers and investors would spend less in the uncertain environment that followed and that economic growth in general would suffer.

In the event, the British economy has stood up well. Yet in contrast to the euro, it now heads into a time of unprecedented constitutional uncertainty with a record current account shortfall as well as more than $2 trillion of public debt that needs servicing annually and which is still climbing.

A number of leading data indicators have turned lower and economists point to the arrival of hefty price increases caused by sterling’s depreciation so far as possible turning points for household spending.

That may come as EU officials deliver the first blows in the talks after an EU summit next month.

“In the medium term, there is clearly pretty large headline risk to the pound and we are starting from a fairly weak position on the deficits, both fiscal and external,” said James Binny, State Street Global Advisors’ EMEA head of currencies. A poster with the word ‘strike’ is fixed at a door at Berlin Schoenefeld Airport, Germany, March 14. Ground staff at Berlin’s two airports walked off the job for the second consecutive day on Tuesday in a wage dispute, again forcing the cancellation of most flights to and from the Ground staff at Berlin’s two airports walked off the job for the second consecutive day on Tuesday in a wage dispute, again forcing the cancellation of most flights to and from the German capital.

The ver.di union, which is seeking improved pay for about 2,000 employees at several companies at the Tegel and Schoenefeld airports, German capital. The ver.di union, which is seeking improved pay for about 2,000 employees at several companies at the Tegel and Schoenefeld airports, called members out on strike from early Monday morning to 5 am (0400 GMT) Wednesday. (AP) called members out on strike from early Monday morning to 5 am (0400 GMT) Wednesday.

On Monday, 660 departures from the airports were canceled, and similar problems were expected Tuesday.

The union warned against using “strike-breakers” to process passengers and planes, saying that would make it impossible for it to announce future walkouts in advance.

However, it said Tuesday that there will be no further strikes before the end of the weekend. Ver. di official Enrico Ruemker said the intention was to give employers “a further pause for thought.” (AP)