Sterling tumbled by around three cents versus the US Dollar last week as the realisation that the UK was likely heading for a ‘hard Brexit’ continued to drive investors out of the Pound.
Multi-Decade Lows
Having tumbled -10% in a matter of minutes during the early hours of Friday October 7, GBP/USD may not strike any official new 31-year lows over the coming weeks. But barring the extraordinary ‘flash crash’ – which took the Pound down from 1.26 to 1.14 and back up to 1.24 in less than an hour – Sterling proceeded to fall to levels not seen since 1985 last week.
‘Cable’ slid by over a cent on Tuesday as comments from Bank of England policymaker Michael Saunders suggested that the BoE would not attempt to normalise policy anytime soon, even if inflation were to outpace the bank’s 2.0% target. British sentiment was also damaged by news that some banks were already planning to move operations from London to Europe due to ‘Brexit’.
Mini Recovery Short-Lived
Sterling recovered some losses versus the ‘Greenback’ on Wednesday morning thanks to comments from UK Prime Minister Theresa May suggesting that parliament would be granted rights to discuss Britain’s post-‘Brexit’ future. However, hopes that the UK could retain access to the single market were quashed later in the day when ‘Brexit’ Secretary David Davis said that it would be the government that ultimately decides on when and how the ‘Brexit’ negotiations take place.
During the evening minutes from the Federal Reserve’s latest policy meeting were released, showing that most policymakers were prepared to vote for higher interest rates in the foreseeable future. This added to the appeal of the US Dollar as rate bets ticked higher to signify a 70% chance of a hike in December.
GBP/USD slid by a further -75 pips on Friday as UK construction output shrank -1.5% and US retail sales rallied 0.6%.
Week Ahead
Prior to the last fortnight, when ‘Cable’ devalued eight cents, speculators were forecasting that GBP/USD could fall to 1.20 over the next few months. Now it is anticipated that Sterling will weaken to 1.10-1.14 in the foreseeable future.
The main events to look out for this week are the UK and US inflation report. British CPI is tipped to jump from 0.6% to 0.9%, while American consumer prices look set to rise from 1.1% to 1.5%. The British report is unlikely to boost the Pound, however, because the BoE appears primed to overlook any currency-related spikes in CPI. The US figure, on the other hand, could easily bolster December rate hike expectations and subsequently drive demand for the ‘Greenback’.