The new prime minister has made his stance on Brexit very clear and has pledged to leave the European Union on Oct. 31 with or without an agreement. The EU has also taken a hard-line approach making it very clear on their side that they will not renegotiate on the previous deal that was reached with Theresa May as PM that was subsequently rejected by parliament.
Media reports that Ireland will not renegotiate the Brexit backstop at an expected meeting with British Prime Minister this month may have contributed to sterling movement with increased political uncertainty forecasted for the coming months.
The future of sterling could rely on several key events in the coming months. A possible event that will most likely affect sterling rates includes the European Central Bank meeting in September.
Historically, we have seen that Brexit is the main driver in the value of sterling and the outcome of Brexit will determine the direction of the currency.
Amongst the Brexit chaos we have seen upward movements for sterling in the last couple of days. This may have been supported by the news that the opposition Labour Party said it would call a vote of no confidence as soon as they believed they could win and would try and form a temporary government and delay Brexit. However, the market is not 100% convinced a no-confidence vote will work and therefore sterling remains low.
Wage growth in the United Kingdom rose to an 11-year high. The unexpected growth in the labour market could put pressure on the Bank of England to hold interest rates. “The data puts the Bank of England in a tricky spot as it could suggest that businesses are spending more on labour ahead of the Brexit deadline rather than making capital expenditure,” said Fritz Louw, a strategist at MUFG in London. However, sterling is still at 2- year low as concerns about a no-deal Brexit still dominate despite the recent wage growth data.
Sterling did however enjoy a small increase last week. This is most likely due to a combination of weak German GDP along with a stronger than expected inflation number from the UK. The actual figure reported was 2.1% beating market expectations of 1.9%. Although the inflation number reported was still below the two percent target, it is reported that this would not warrant any change at the next Monetary Policy Committee meeting
Another factor in the small rise last week was the better-than-expected retail sales report, retail sales rose by 0.2% month on month in July. The market was anticipating a 0.2% decline, on a yearly basis retails sale were up by 3.3% this may have raised hopes the economy is in better shape than previously thought.
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