Wednesday 21 February 2018

Sterling strengthens on BoE hints - but for how long?

Governor of the Bank of England Mark Carney. Photo: Joshua Roberts/Reuters
Governor of the Bank of England Mark Carney. Photo: Joshua Roberts/Reuters
Colm Kelpie

Colm Kelpie

Having surged to a point where it looked like parity with the euro wasn't that far fetched, sterling did a sudden about-turn in recent days, giving some welcome breathing space to Irish exporters.

But it's a tight space - and analysts believe it is likely to narrow once more.

Amid continued uncertainty around the Brexit talks, and a strengthening euro, the pound inched to 93 pence to the euro at one point in the last few weeks, reaching an eight-year low.

But hints from the Bank of England that the first rate increase in a decade could happen in the "coming months", catapulted the pound past the $1.36 mark for the first time since the day of the EU referendum, and eased it back to around 87p to the euro.

Yesterday, it was hovering at around 88 pence. That marks a reprieve for exporters, who have been on a sterling roller-coaster since before last year's Brexit vote.

"It very much caught markets off guard, the warning that a rate hike is likely in the coming months, so we're seeing that now reflected in futures contracts.

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Click to view full size

"We now expect a UK rate hike by March of next year, and a further increase is expected by mid 2019," AIB's senior economist John Fahy told the Irish Independent, saying a rate hike before the end of the year can't be ruled out.

"By then they expect that the bank rate will have increased by 50 basis points overall, bringing it back to 0.75pc.

"This is quite a hawkish shift in UK rate expectations in a very short space of time.

"Back in early September, the market wouldn't have been expecting a BoE rate hike until the second half of 2019."

Banking giant HSBC has been the first of the big names to roll back on its parity predictions.

Forecasters said they had got it wrong and that euro/sterling wouldn't hit parity by the end of this year.

They now see the euro buying 89 pence by the end of 2017.

Despite the announcement by the Bank of England - which is led by Governor Mark Carney - currency worries are likely to dominate for some time.

Farmers, exporters and border retailers are all feeling the pinch, and the continued uncertainty out of the UK in terms of the Brexit talks is doing little to inspire confidence.

So where's the pound likely to go now? Analysts still take a bleak view.

"Over the coming months, Brexit negotiations are likely to remain the key factor influencing sterling, and on that basis - with the prospect of limited progress between now and year end - we could see euro/sterling trading at 87p-93p range over that period," added Mr Fahy.

"If you want to look ahead towards next year, it's very much dependent on what happens in those negotiations.

"Progress towards a soft Brexit could push sterling back towards or below 85p, but if a hard Brexit looks more likely, then euro/sterling could trade up towards the 95p range and beyond."

His belief for this year is that it could settle by year end around the 90p mark.

It's a similar view from Nikki Canavan, head of retail sales at Bank of Ireland Global Markets. "While the prospect of higher interest rates is supporting sterling, which has strengthened to around 88.5p from 93p at the end of August, Brexit uncertainty remains a considerable risk for the UK economy," Ms Canavan said

"This is likely to cap any further gains for sterling, and indeed we think it is more likely to drift again to in and around the 92p level over the coming months."

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