Ster­ling slips back be­low $1.31 as Brexit talks be­gin

Kuwait Times - - BUSINESS -

Ster­ling slipped back be­low $1.31 yes­ter­day af­ter soar­ing to its high­est lev­els in 10 months at the end of last week on a broad dol­lar sell-off. Traders were cau­tious as four days of Brexit ne­go­ti­a­tions be­gan in Brus­sels.

The pound jumped al­most 2 cents on Fri­day to hit $1.3113 <GBP=D3, its strong­est since last Septem­ber, af­ter U.S. in­fla­tion and re­tail sales data came in weaker than ex­pected, putting into doubt the prospect of a fur­ther rate hike from the Fed­eral Re­serve this year.

But ster­ling started the week by edg­ing down from those highs, trad­ing down 0.1 per­cent on the day at $1.3089 and flat against the euro at 87.50 pence, still close to a three-week peak hit on Fri­day. Brexit Sec­re­tary David Davis, in the Bel­gian cap­i­tal for talks with the Euro­pean Union’s chief ne­go­tia­tor Michel Barnier a month af­ter a first meet­ing, said on Mon­day that hav­ing “made a good start” dur­ing their last en­counter, “this week we’ll be get­ting into the real sub­stance”.

With less than two years to set­tle di­vorce terms be­fore Britain leaves, deal or no deal, on March 30, 2019, the 27 other EU na­tional lead­ers want Bri­tish Prime Min­is­ter Theresa May to rally her di­vided na­tion swiftly be­hind a clear, de­tailed plan that can min­imise eco­nomic and so­cial dis­rup­tion across Europe.

In­vestors will be watch­ing the talks closely, with any signs that Britain will lose pref­er­en­tial ac­cess to Europe’s sin­gle mar­ket likely to weigh on the cur­rency. “It seems that the Bri­tish govern­ment wants to (take) ma­jor steps to­wards the EU in the up­com­ing round of ne­go­ti­a­tions... It has for ex­am­ple ad­mit­ted by now that it would meet its fi­nan­cial obli­ga­tions to­wards the EU — an aus­pi­cious be­gin­ning,” wrote Com­merzbank an­a­lysts in a note to clients.

“The sit­u­a­tion re­mains dif­fi­cult for the pound, how­ever, as the re­cent re­ports of do­mes­tic po­lit­i­cal quar­rels in the UK show .... In the short term, it may not be a break­down of the Brexit ne­go­ti­a­tions, but a break­down of the Bri­tish govern­ment which is the big­gest risk for ster­ling.”

Bri­tish fi­nance min­is­ter Philip Ham­mond was the sub­ject of a num­ber of news­pa­per sto­ries over the week­end, in­clud­ing one which said he had called pub­lic sec­tor work­ers “over­paid”. The fi­nance min­is­ter said he was be­ing at­tacked for his Brexit views. Some an­a­lysts, though, said ster­ling’s main driv­ers at the mo­ment were less about pol­i­tics and more about the econ­omy and the out­look for mon­e­tary pol­icy. Re­cent warn­ings from Bank of Eng­land pol­i­cy­mak­ers that in­ter­est rates could be set to rise have pro­vided sup­port to the cur­rency.

In­vestors will be watch­ing Bri­tish in­fla­tion data due to­day closely. “It seems that mon­e­tary pol­icy is hav­ing more weight than the Brexit talks; if Tues­day’s in­fla­tion fig­ures from the UK sur­prise to the up­side, ex­pect ster­ling to con­tinue ral­ly­ing,” wrote FXTM strate­gist Hus­sein Sayed. — Reuters

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