(Bloomberg) -- The pound could wake up from its snooze soon.
Volatility in the U.K. currency remains subdued even as political drama continues to dominate. With Prime Minister Theresa May’s fate on the line over her Brexit plans and the August Bank of England meeting coming closer, that could be set to change, according to BNY Mellon.
“The political backdrop in the U.K. could well be a source of disruption to market equanimity over the summer months,” wrote senior currency strategist Neil Mellor in a research note. With the U.K. government facing tough choices on whether to extend the Brexit process or even hold a fresh referendum, “the mood music on the economy might therefore prove to be important.”
Pound traders have been caught between two competing forces, with positive noises from the BOE drowned out by concerns over Brexit. The result of this has been volatility close to the lowest levels this year even as political tensions appear to be increasing.
After May’s Brexit plan unleashed revolt from euroskeptic lawmakers, sterling is vulnerable to a leadership challenge for the prime minister, while it could benefit if the European Union accepts her proposals. The pound fell nearly 6 percent last quarter to around $1.32, with the median of forecasts in a Bloomberg survey seeing it recovering to $1.35 by the end of this year.
Mellor sees the continued threat of a parliamentary stalemate into the autumn making it difficult for BOE hawks to recruit the extra voters they need to lock down an August rate hike. That could spur another selloff in sterling as money markets are pricing in a more than 80 percent chance the central bank will raise rates next month.
To contact the reporter on this story: Charlotte Ryan in London at cryan147@bloomberg.net
To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee
©2018 Bloomberg L.P.
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