Friday 20 July 2018

Brexit and interest rate hikes give sterling a bumpy ride

The pound has climbed 9% against the US dollar since the start of the year.

Theresa May and EU President Jean-Claude Juncker (PA)
Theresa May and EU President Jean-Claude Juncker (PA)

By Ben Woods, Press Association Chief City Correspondent

Sterling made a rousing comeback in 2017, but failed to reach its pre-Brexit heights as uncertainty surrounding Britain’s divorce deal continued to stalk the UK currency.

Despite a turbulent 12 months punctuated by a snap general election and the first interest rate rise for more than a decade, the pound climbed 9% against the US dollar to reach 1.34 by December 20, up from 1.23 at the beginning of January.

Against the euro, sterling endured a more difficult year, falling 4% to 1.131.

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The pound started 2017 in the doldrums, drifting to a three-month low against the US dollar on January 16 as traders pondered the prospect of a “hard Brexit” that pulls the UK out of the single market and the customs union.

However, the Prime Minister’s pledge to put the Brexit deal to a Parliamentary vote in her Lancaster House speech helped lift the pound 3% to 1.24 on January 17.

Setting out her 12 key objectives for EU withdrawal, Mrs May said Britain would leave the European single market and seek a “bold and ambitious” free trade agreement to allow it to continue trading with its 27 former partners.

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Traders took some comfort from the comments, but Brexit jitters were back in force come March when Mrs May signalled her intent to trigger Article 50 by the end of the month.

Scotland’s First Minister, Nicola Sturgeon, added to the pressure on March 14 by outlining plans for a second independence referendum, causing sterling to hover near eight-week lows against the US dollar.

When Article 50 was finally invoked on March 29, the pound rose 0.6% versus the European currency to 1.158, as Mrs May declared that Britain had reached “an historic moment from which there can be no turning back”.

In a letter to European Council president Donald Tusk, she said the UK wanted a “deep and special partnership” with the future EU of 27, but restated her determination the UK should regain control of its borders.

Politics was also pulling the strings a month later when the Government called a snap general election for June 8, claiming that divisions at Westminster risked hampering the Brexit negotiations.

It capped off five days worth of gains for the pound against the greenback to reach 1.28 on April 18 and 1.20 versus the euro.

Fast forward to the general election result and it was a contrast of fortunes for the UK currency as it plunged to its lowest level since mid-April after the Conservatives fell short of an overall Commons majority, resulting in a hung parliament.

The outcome took the markets by surprise as the lion’s share of traders had priced in a healthy Conservative majority giving Mrs May free rein to take charge of the Brexit negotiations.

Some analysts believed the only reason the pound had not gone into free fall was because a hung parliament increased the likelihood of a softer Brexit.

While most of the pound’s cues came from Britain’s truncated Brexit negotiations, hints that the Bank of England was preparing to hike interest rates gave sterling fresh impetus in September.

The UK currency rocketed to its highest level against the US dollar for a year at 1.36 on September 14 after the Bank gave its strongest signal yet that a rate rise was on the cards to cool surging inflation.

Minutes from the Bank’s nine-strong Monetary Policy Committee (MPC) showed that all policymakers believed “some withdrawal of monetary stimulus was likely to be appropriate over the coming months”.

However, the excitement petered out by the time the Bank hiked rates for the first time in more than 10 years to 0.5% on November 2.

The quarter-point rise reversed the emergency cut seen in the aftermath of the Brexit vote shock in 2016 as the Bank sought to head off turmoil in the economy.

Sterling fell more than 1% to 1.31 US dollars and 1.12 euros, as the Bank’s comments over future rises were more cautious than expected.

Brexit returned as the key driver behind the UK currency in the final weeks of the year, with traders keeping a watchful eye on how the Government’s EU negotiations were progressing.

Sterling surged against the US dollar – eventually hitting 1.35 on November 30 – after the Daily Telegraph reported that the UK and EU were on the brink of reaching an agreement on the divorce bill.

The agreement was eventually struck on December 8 that would see the UK pay a financial settlement of around £35-£39 billion (40-45 billion euro) as it leaves the EU, paving the way for trade talks to begin.

Press Association

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