Markets Confounded by BOE Brushing Aside Risk of No-Deal Brexit

(Bloomberg) -- If the Federal Reserve's policy stance was somewhat puzzling, the Bank of England's decision a day later has left markets utterly clueless.

The U.K. central bank's refusal to acknowledge the risk of a no-deal Brexit, which has driven the pound to a 2 1/2-year low, has disappointed investors who expected the institution to bring some clarity to the matter.

Sterling held losses and gilts rallied as traders largely overlooked the BOE's decision to hold rates and its updated forecasts that excluded the possibility of the U.K. enduring a disorderly exit from the European Union. Money markets continued to price in a 55% chance of a BOE interest-rate cut this year, even though inflation is projected to exceed the central bank's 2% target.

“I honestly have no idea what the core message was that the BOE or Governor Carney were attempting to convey,” said Peter Chatwell, head of European rates at Mizuho International Plc. “It got more convoluted -- I will continue to recommend clients take no notice of the BOE when investing in GBP rates.”

The pound has tumbled since Boris Johnson took over from Theresa May as Prime Minister last month as traders price in a bigger chance of Britain leaving the EU without an agreement on Oct. 31. At the same time, central banks across the world are signaling looser monetary policy, with the Federal Reserve delivering a quarter-point rate cut Wednesday.

Sterling dropped as much as 0.7% to $1.2080, the lowest level since January 2017, before paring losses to trade above $1.2100. Ten-year gilt yields dropped two basis points to 0.59%, the lowest level in nearly three years.

“The brutal pound sell-off has registered with the Monetary Policy Committee and they are now trying to contain the damage done as much as possible,” said Valentin Marinov, head of Group-of-10 foreign-exchange research at Credit Agricole SA. “Carney was trying to sidestep the issue of no-deal Brexit as much as possible.”

For now, it's likely to be political developments that drive sterling. Strategists have suggested that a plunge in the currency in a short time span, or a level below $1.19, might ramp up the pressure on Johnson to rein in his rhetoric on a disorderly exit from the EU.

To contact the reporters on this story: John Ainger in London at jainger@bloomberg.net;Charlotte Ryan in London at cryan147@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Anil Varma

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