Sterling strengthened by around half a cent against the US Dollar last week as hopes of a mutually beneficial ‘Brexit’ trade deal increased slightly.
‘Brexit’ Trade Deal Vote Boosts Pound
‘Cable’ jumped higher by around 150 pips last Tuesday in response to news that British MPs would have the chance to vote on the government’s eventual ‘Brexit’ trade deal. A High Court lawyer representing the government indicated that parliament would most likely need to ratify any deal, which cheered traders because it suggests any deal containing excessive economic risks will not make it through parliament.
On Tuesday it was also reported that UK CPI rose from 0.6% to a two-year high of 1.0% in September, while US inflation jumped from 1.1% to 1.5%. The data suggests that the Bank of England may hold off on its plan to slash rates in November, while the American figures fueled speculation that the Federal Reserve will hike rates in December.
Softer ‘Brexit’ Tone Supports Sterling
On Wednesday Sterling garnered support thanks to a softer tone from UK Chancellor Phillip Hammond and a sturdy unemployment rate report, indicating that joblessness remained at an 11-year low of 4.9% in August. Hammond confirmed that the BoE would retain its independence and stated that Britain would seek the best possible access to the EU single market following ‘Brexit’. The Chancellor also suggested that the ‘deeply pragmatic’ people at the EU would help to forge a mutually beneficial trade deal.
The Chancellor’s remarks bolstered the appeal of the Pound because they contained hints that, contrary to previous remarks, the UK government will not sacrifice all possibility of a strong trade deal in its pursuit of greater controls on immigration.
However, GBP/USD remained flat as demand for the US Dollar was also boosted by the latest televised US Presidential debate, which most analysts saw as a victory for the market friendly Democratic candidate Hillary Clinton. Unpredictable Republican nominee Donald Trump’s comments on not accepting defeat did not appear to garner too much support from the American electorate.
Week Ahead
Although the Pound to US Dollar exchange rate has settled somewhat from the incredible volatility surrounding the ‘flash crash’ (which saw GBP/USD plunge 12 cents and rebound 10 cents within a matter of minutes), the week ahead poses risks to Sterling.
The third quarter US GDP report is tipped to see annualised growth accelerate from 1.4% to 2.5%, which could easily boost Fed rate hike expectations and cause the ‘Greenback’ to appreciate.
Conversely, the Q3 UK growth report is anticipated to show quarterly expansion slow from 0.7% to 0.3%. Anything lower than 0.3% could damage Sterling, while anything higher could potentially act as a crutch for the Pound.