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Sterling rose during the first days of this week, following a steep fall last week, as political uncertainty eased and data on the industrial sector beat expectations. British factories had their best two months of 2017 in July and August, implying that the Bank of England remains on track to increase interest rates in the near future. Sterling rose on this data in stark comparison to its lows at the end of last week.
However the rise was short lived with further uncertainty growing over the UK Brexit negotiations. This week both London and Brussels have issued statements that “the ball” is in the other’s court, making it seem increasingly likely that negotiations are at a standstill. Fuel was added to the fire when Theresa May stated that her government is preparing for each possible outcome, including no deal being reached with the EU. To emphasize May’s statement, the government then released two whitepapers at the start of the week on international trade and future EU customs policies which set out essential preparations in the case of no deal being reached.
Furthermore, when Finance minister Philip Hammond declared that the government was planning for all possibilities, including Britain’s leaving with no agreement on the terms of its departure, we saw sterling fall once again. Mr. Hammond said that Brexit has cast a “cloud of uncertainty” over the economy, and the government is preparing for the potential of a “Hard Brexit” in 2019.
“The British government seems to be out of its depth when it comes to the Brexit issue. That is relevant for the FX market as this more than encumbers the negotiating process and as the likelihood of accidents rises, the risk that the end result will turn out in a way nobody wants it to – and thus in a way that is GBP negative,” said Ulrich Leuchtmann, economist with Commerzbank after watching Mays speech.
No deal upon leaving the EU is theoretically the worst conceivable consequence for sterling which would then be upset by a mixture of uncertainty and investor fright. For sterling to stabilise it’s important that trade negotiations can be finalised quickly.
Check back with us next week for a run through of how the first day of the European Council meeting starting on the 19th is impacting the markets.
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