Pound volatility continues as no clear outloook

Britain’s pound traded flat this morning, rooted just over a cent off last week’s lows against the dollar and threatened by a round of data that may give the first clues to any post-Brexit vote weakening of the UK economy.

While June’s PMI surveys of sentiment among company purchasing managers will be largely discounted as referring to the period before the vote, some banks wonder if Tuesday’s print for the dominant services sector of the economy will already show some fallout.

The survey period covers three working days after the EU referendum. If many companies filed returns after the vote, we could see a soft print.

That would argue for more easing than the quarter-point reduction in interest rates by the Bank of England which money markets are already pricing in for August.

The pound suffered at the end of last week from BoE Governor Mark Carney’s guidance that it was likely the bank would have to ease policy over the summer to counter the economic shock of Britain’s June 23 vote to leave the European Union.

But while most major banks have been predicting more weakness, a repricing of expectations for U.S. interest rates has helped sterling hold above a low of $1.3122 hit in the first two days after the vote.

The weekend’s headlines were dominated by mixed messages from the candidates seeking to replace David Cameron as Conservative Party leader and prime minister, offering markets little certainty about the outlook for the months ahead.

Brexit will remain the dominant story in the markets again this week.

Until we know who is going to lead the UK through this particular storm, we’re unlikely to get much more clarity on what the next steps will be. So we can expect to see the volatility continue.

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