Ster­ling’s re­vival: a false dawn

The Irish Times - Business - - BUSINESS NEWS -

Ster­ling’s mini re­vival has brought some wel­come re­lief to Ir­ish ex­porters, but with the Brexit ne­go­ti­a­tions on a knife edge and UK growth still weak, the shift may be short-lived.

The UK cur­rency surged to a six-week high of 89p against the euro this week, spurred by a sur­prise jump in UK in­fla­tion to 2.9 per cent in Au­gust, which height­ened spec­u­la­tion that the Bank of Eng­land may move to raise in­ter­est rates ear­lier than ex­pected or at least sig­nal as much when it meets later to­day.

Last month the bank’s nine-mem­ber Mon­e­tary Pol­icy Com­mit­tee voted seven-two in favour of main­tain­ing rates at the cur­rent level.

If a third dis­senter joins the two votes call­ing for a hike or gover­nor Mark Car­ney makes more hawk­ish noises af­ter to­day’s meet­ing, this would prob­a­bly be enough to strengthen ster­ling fur­ther.

How­ever, once this set-piece is over, the fo­cus will re­vert to the po­lit­i­cal arena and Brexit.

UK prime min­is­ter Theresa May is sched­uled to make two big speeches on Brexit in the com­ing weeks, cul­mi­nat­ing in an ad­dress to the Tory party con­fer­ence next month. This has the po­ten­tial to push ster­ling the other way if prece­dent serves as a guide. Last year, at the same con­fer­ence, her speech, which put re­gain­ing con­trol of im­mi­gra­tion above stay­ing inside the EU’s sin­gle mar­ket, sent ster­ling plung­ing. De­spite Down­ing Street’s ef­fort to soothe fray­ing busi­ness nerves, the govern­ment’s pro­nounce­ments have tended to sow deeper con­fu­sion about the UK’s Brexit pol­icy. Up­com­ing Euro­pean Coun­cil meet­ings are also likely to draw at­ten­tion to the slow progress in the Brexit ne­go­ti­a­tions. Per­haps pre­dic­tions of euro-ster­ling par­ity, led by HSBC and Morgan Stan­ley, are too bear­ish, but the UK govern­ment’s fuzzy po­si­tion on Brexit and the lack of mean­ing­ful progress in the Brexit talks make things im­pos­si­ble to pre­dict. While many in­vestors be­lieve there is value in ster­ling given the in­her­ent strength of the UK econ­omy, the Brexit phe­nom­e­non makes it more un­pre­dictable than usual. As a cur­rency an­a­lyst said last week: “We are stay­ing away from ster­ling for now as it re­mains a head­line-driven cur­rency even though on a val­u­a­tion ba­sis it looks at­trac­tive.”

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