Pound firmer in early trade

Published Jul 18, 2016

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London - Sterling rose on Monday, boosted by expectations of inflows from an acquisition deal after Japan's Softbank agreed to buy chip designer ARM in a 24.3 billion pound deal and which should help plug Britain's yawning current account gap.

Finance Minister Philip Hammond welcomed the all-cash deal and said Britain remained an attractive destination for investment after the Brexit vote.

ARM, the most valuable tech company listed in London by market value, is a major presence in mobile processing, with its processor and graphics technology used by Samsung, Huawei and Apple in their in-house designed microchips. The deal is also Softbank's largest to date.

Sterling was up 0.4 percent at $1.3251, while against the euro it was higher at 83.40 pence per euro. Traders said better risk appetite in global markets after jitters over a failed coup in Turkey subsided was also helping the pound.

“The big business news headline... is that Softbank has agreed to buy ARM Holdings. That's three months of the UK's current account deficit financed in one fell swoop,” said Kit Juckes, head of currency strategy at Societe Generale.

Sterling has fallen sharply to hit a 31-year low against the dollar after Britain voted to exit the European Union in a vote held on June 23. Investors are worried that Britain will face a recession in coming quarters and will find it increasingly hard to finance its current account deficit - currently at 5 percent of GDP - and amongst the highest in the developed world.

Despite Monday's bounce, traders remain cautious about the currency with recent economic surveys pointing to a weakening in business and consumer confidence.

A survey by Deloitte released on Monday showed Britain's biggest companies are beset by doubts about the future after last month's vote to leave the European Union and have slashed their investment plans. And a survey by the British Retail Consortium found that the number of shoppers heading to the high streets and retail centres fell at the fastest pace in more than two years in June.

All of which kept alive expectations that the Bank of England would ease monetary policy next month.

Andrew Haldane, chief economist at the BoE, said on Friday that the central bank needed to come up with a package of mutually-complementary monetary policy easing measures in time for a rate-setting meeting on August 4.

Sterling forward interest rates, which had been pricing in a strong chance of a cut in the bank's 0.5 percent base rate to zero by September, now only fully price in a single quarter-point cut.

“We expect front loaded sterling/dollar weakness as the BoE adopts a range of easing measures at their August meeting and choose this pair as our trade of the week,” Morgan Stanley said in a morning note. They target a drop to $1.25 with a stop loss at $1.38.

REUTERS

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