London Markets: U.K. stocks slip as pound rallies to highest since Brexit vote

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U.K. stocks dropped for a second straight session on Tuesday, bucking an otherwise positive trend across Europe, as the pound rallied to its highest dollar level since the Brexit referendum in 2016.

Traders were waiting for U.K. unemployment and wage data in the morning, looking for a hint to the health of the U.K. economy ahead of the Bank of England’s monetary policy meeting in May.

What are markets doing?

The FTSE 100 index UKX, -0.08%  was down 0.1% at 7,194.80, on track for its lowest close since April 6, according to FactSet data. On Monday, the London benchmark fell 0.9%, as sterling showed signs of strength.

On Tuesday, the pound GBPUSD, +0.2092%  jumped to $1.4372, up from $1.4338 late Monday in New York. Sterling has now rallied more than 3% against the dollar over the past month and is up almost 15% over the past year.

What is driving the markets?

The pound rally kept a lid on U.K. stocks. Gains for the currency tend to weigh on the British blue-chip index, as it can hurt the revenue made overseas by multinational companies when converted back into sterling.

The renewed strength in the pound comes as traders increasingly price in a BOE interest-rate rise in May and as the dollar continues to weaken. The buck took a leg lower on Monday after U.S. President Donald Trump in a tweet accused Russia and China of engaging in “currency devaluation.”

Analysts said the near-term direction for the pound will be determined by U.K. data. The macroeconomic readings can help to weaken or strengthen the case for the BOE to hike rates next month.

What are strategists saying?

In particular focus for traders are the February U.K. unemployment and wage data, due at 9:30 a.m. London time, or 4:30 a.m. Eastern Time, on Tuesday.

Economists forecast a rise of 2.8% in average pay, excluding bonuses, and the same gain including bonuses, according to FactSet.

What are strategists saying?

“It seems that we’re back to good old-fashioned U.K. data watching to determine the short-term direction for the currency. A 3% wage growth print in today’s U.K. jobs report should seal the deal for a May BOE hike,” said Viraj Patel, FX strategist at ING, in a note.