Pound Bulls Damaged by Slow Growth Data Set to Face PMI Test

(Bloomberg) -- The best-performing Group-of-10 currency over the past six months may have just been stopped in its tracks.

Traders face another string of top-tier U.K. data this week, including purchasing managers' reports on manufacturing output and services for April, with the latter providing an early barometer of how the largest segment of Britain's economy is faring in the second quarter. Sterling came under pressure after Home Secretary Amber Rudd resigned late Sunday, robbing Prime Minister Theresa May of a pro-European ally just as internal battles over Brexit come to a head.

Strategists turned against the pound last week after the worst U.K. economic-growth report since 2012 all but killed the chances of the Bank of England raising interest rates in May. Toronto-Dominion Bank capitulated on its short euro-sterling recommendation, while Standard Bank suggested selling the British currency versus the dollar.

“Sterling looks vulnerable against most currencies,” Steve Barrow, head of G-10 currency strategy at Standard Bank, said in a telephone interview Friday. “We knew that growth was slowing down and we found out that it's more than anticipated.”

The first-quarter GDP data miss was the latest blow for sterling bulls, with money markets now pricing in around a one-in-five chance of a hike next month. The first warning sign came after BOE Governor Mark Carney rattled markets by suggesting that an increase was not a done deal. Before that, traders were pricing an almost-90 percent chance of a hike in May, with a second potentially coming in November.

Rate Path

Other banks were left scrambling to update their BOE policy calls following the GDP print. UBS Group AG is now forecasting no rate hike in 2018, from one in May before, while NatWest Markets cut its expectations for two increases this year to one, with it coming in August, from May previously.

For 13 consecutive years, the pound rallied against the dollar in April -- a trend it now looks set to break. One-week risk reversals versus the U.S. currency suggest that sterling traders are positioned for further weakness.

The pound fell 0.2 percent to $1.3760 as of 9:04 a.m. in London, after falling 1.6 percent last week. Standard Bank's Barrow recommended a short position in pound-dollar, with a target of $1.3640. Sterling was little changed at 88.08 pence per euro.

Brexit negotiations also have the potential to unsettle the pound, despite the currency edging higher against the euro in recent months. Barrow said the BOE may now wait until it has a clearer picture on the shape of the final Brexit deal.

“The softer-than-expected 1Q GDP report has added to market doubts the Bank of England will be able to hike at its May meeting,” Toronto-Dominion strategist Ned Rumpeltin wrote in a note to clients. The Canadian bank had recommended a long position in the pound at 87.5 pence per euro, looking for it to strengthen to 83.5 pence. “It is prudent to exit this position at this time.”

--With assistance from Charlotte Ryan

To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net.

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Keith Jenkins, Neil Chatterjee

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