Sterling gained for a second day yesterday as UK chancellor of the exchequer Philip Hammond said the government wanted to keep all options open as it exits the EU, fuelling speculation that there’s a possibility that the country may retain special access to the single market.
The UK government wants to “keep as many things on the table” as possible, Mr Hammond told MPs when questioned about the possibility of Britain leaving the EU customs union as a result of Brexit.
“Although Hammond is not giving anything away at this stage of his testimony, it gives the markets a glimmer of hope that the UK may not target a hard Brexit,” Kathleen Brooks, a research director at brokerage City Index in London, wrote in a note.
“His opening comments did mention that the current government will bring down net migration to the UK, however, he hasn’t linked this to throwing out access to the EU single market or customs union,” she said.
Sterling advanced 0.2% to 89.09p against the euro in London trade, erasing an earlier drop. It was little changed at $1.2297, adding to a 0.9% advance from Tuesday.
In his comments, Mr Hammond sought to reassure Britain’s powerful banking sector that he would protect its access to skilled labour and the EU’s single market once the country leaves the bloc.
He told politicians that the sector’s interests would be “a very high priority” when the UK tries to find balance the need for continued access to EU markets with the call from many voters for tighter control on migration.
“I cannot conceive of any circumstances in which we would be using those migration controls to prevent banks, companies moving highly qualified highly skilled people between different parts of their businesses,” he said.
The latest developments on the currency markets show that sterling is being driven by political events and the uncertainty about the deal that the UK and EU will eventually strike over Britain’s divorce terms.
German chancellor Angela Merkel’s government is battening down the hatches for the coming Brexit talks, instructing officials to avoid any back-door contacts that could hand the UK an advantage.
Ms Merkel’s chancellery is receiving UK diplomats but politely refusing to grant the UK any favours in advance of the official negotiations, according to sources.
However, cold relations between London and the EU may not bode well for Ireland’s interests which aim to avoid a hard Brexit and the re-emergence of a hard border potentially restricting trade and movement of people across the border and Britain.
UK real wages are rising at the weakest pace since early 2015, data published yesterday showed, as oil prices and the weaker pound stoke inflation. The pressure looks set to intensify with employment growth slowing and some economists predicting price gains of 3% next year.
“There are signs of cracks appearing in the UK labour market after resilience in the run-up to, and immediate aftermath, of June’s Brexit vote,” said Howard Archer at IHS Global Insight. “Muted earnings growth threatens to weigh down on consumers’ purchasing power along with markedly rising inflation,” he said.
Signs of the crunch come a day after UK data showed inflation hit 1% in September, the fastest in almost two years.
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