By Eamon Quinn
Sterling continued to climb for a second day, on the view that an unlikely Brexit deal will be struck, if not this month then sometime before the end of the year.
In a surprise move, following the breakdown of the weekend talks between the UK government and the EU chief Brexit negotiator, Michel Barnier, over the border, the UK currency jumped by a significant 0.4% against the euro, to 87.69 pence, in the latest session. Against the dollar, it was up 0.4%, at $1.3211.
Investors said the pound also rose against most of the world’s big currencies, after UK, average three-month earnings rose sharply, suggesting that the economy is operating with little slack. But despite the stronger wage numbers, the Bank of England is not expected to increase interest rates before Britain leaves the EU in March.
Money markets are pricing the next rate move for August, 2019. Rises in interest rates help boost currencies. “Earnings have surprised to the upside, which is even more surprising, given Brexit uncertainty,” said Neil Jones, head of hedge fund sales at Mizuho Bank.
UK and EU officials are not expecting any breakthrough this week, with the border remaining a sticking point.
A Reuters poll showed there is still a one-in-four chance that Britain and the EU will part ways in less than six months without reaching a deal.
When asked what probability they attached to the likelihood of a disorderly Brexit economists who were questioned largely before the talks hit an impasse gave a median 25%, unchanged from a September poll.
“A deal is still more likely than not,” said Kallum Pickering, at Berenberg. British inflation jumped after the Brexit vote, mostly driven by a slump in sterling, and is not expected back at the Bank of England’s 2% target until late next year.
It will average 2.5% this year and 2.1% next, the poll said. UK growth will remain robust, albeit slower than expected for Britain’s peers. The UK economy is predicted to expand 1.3% this year, 1.5% in 2019 and 1.6% in 2020, the poll of 80 economists found. Shares across the globe rose.
“Despite the inability to strike a deal, a strong rebound for the pound has been a core reason behind why the Ftse recovery is disproportionately smaller than moves across the likes of the Dax and Dow,” said Josh Mahony, at online broker IG.
A Bank of America-Merrill survey found fund managers were the most bearish over global growth since 2007 and were keeping high levels of cash away from equities.
Additional reporting: Reuters and Bloomberg