Progress in the negotiations between the UK and Europe as we’ve heard of late this week should be seen as supportive for the ailing pound. Uncertainty has been the biggest issue since last June when we as a nation decided to leave the European Union. When will we leave, what will it cost, who decides our future, where will expats and Europeans residing in the UK live in the future? Just a few of the questions that have been posed and weighed on GBP in the last few months. Some of these have been answered already of course, but the apparent butting of heads between David Davies and his counterpart Michel Barnier had led to the talks being described as deadlock.
European Council President Donald Tusk has described this lack of progress as exaggerated however, and although there isn’t yet ‘sufficient’ headway there has been some and Theresa May who attended a Brussels summit earlier today stated that she is ‘optimistic’ of the near term future of the process. The remaining 27 members of the EU have agreed that the second phase of negotiations can now take place in December.
The pound has had a mixed week however, as the market has moved down from the highs that we saw last week after expected but muted UK inflation figures. Tuesday posted these at 3.00%, which was in line with the predictions but crucially below the 3.1% level which would mean that Mark Carney would need to write a letter of explanation to chancellor Philip Hammond. Higher than the 2.00% target has long been a reason why the Bank of England might want to act on monetary policy. With unemployment being at a 45 year low, the consensus within the market is that the BOE can justifiably raise the base rate for the first time in nearly 10 years.
Focus now will shift to this event and already we stride into next week with some optimism, the market may have already factored in the rate increase, and anything other than at least a 0.25% rate rise would be frankly catastrophic to the pound. Looking ahead, if the sentiment from the Bank is that this could be the first of a glut of increases then it could support the pound further.
Those of you who have waited for rates should be satisfied at the €1.12 where we are currently. It’s important however to keep your finger on the pulse, ear to the ground, and eye on the market as when this moves it could do so quickly and not last for that long.
By Luke Trevail, senior currency-trader