Johnson, Factory Data Could Preside Over Pound's Fate This Week

(Bloomberg) -- What do U.K. Foreign Secretary Boris Johnson and manufacturing data have in common? They will both be the focus of pound traders this week.

Sterling pared its biggest monthly gain in at least two years on Friday as disappointing economic numbers exacerbated uncertainty surrounding the Brexit talks. With the ruling Conservative Party's annual conference starting Sunday, and a host of reports including sentiment surveys for the construction and services industries through the week, the pound could be pulled in conflicting directions, according to strategists.

Britain's divorce negotiations with the European Union are set to dominate the four-day Conservative conference, with the gathering also closely scrutinized for any maneuverings by potential rivals against Prime Minister Theresa May's leadership after the disastrous general election result in June. The pound was whipsawed last month on media reports that Johnson considered resigning after setting out his own competing agenda for Brexit.

The event “will be watched to see if May has the ability to pull the party behind her,” said Jane Foley, head of currency strategy at Rabobank. “Right now the signs do not look good.” Any challenge to May's leadership at the conference could send sterling lower, she said.

The pound fell against most of its Group-of-10 peers on Friday after data showed Britain's current-account deficit widened in the second quarter and the economy grew at its slowest annual pace in four years. That pared its gain versus the dollar to less than 4 percent in September. Still, that was its biggest monthly increase since at least 2015 and has been driven by hawkish Bank of England rhetoric.

Last year's Conservative conference demonstrated its ability to move the currency. At the gathering, May surprised markets by indicating a preference for a so-called hard Brexit. That spurred a sterling slump in the following days, a move exacerbated by computer-initiated sell orders, leading to a flash crash in the currency to a 31-year low on Oct. 7.

At this year's event, “the market would rather see the probability of Johnson becoming prime minister decline in the near term, which may be more positive for the pound as he has a much tougher stance on Brexit,” said Thu Lan Nguyen, a strategist at Commerzbank AG.

As for economic reports, IHS Markit's Purchasing Managers Indexes for the manufacturing, construction and services industries will be in focus this week.

With investors pricing in two BOE interest-rate increases by next August, “if we get some disappointing economic data, it would at least impact the medium to longer term rate outlook and therefore obviously the pound,” Foley said.

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, Scott Hamilton