Volatile sterling swings on Brexit talks fears

Sterling swung between gains and losses yesterday, whipsawed by headlines surrounding the status of the UK’s eventual exit from the EU.

Volatile sterling swings on Brexit talks fears

Still, the currency headed for its first weekly advance in a month as market pricing for a rate increase by the Bank of England climbed. Sterling was trading higher on the day, after earlier falling in just one minute as German chancellor Angela Merkel’s press secretary said that it was too early to discuss any transition deals on Brexit.

European Commission president Jean Claude Juncker also said that the process would take longer than initially thought.

“No one has a clue right now, and sterling markets are trading irrationally to headlines that may not mean much in the grand scheme of Brexit negotiations,” said Viraj Patel, a currency strategist at ING.

Against the euro, sterling rose 0.3% to 88.94p and headed for a weekly gain of 1.7% against the dollar. Even as sterling whipsawed, it has defied Brexit risks to be the best-performing major currency over the past year.

Money markets are now pricing an 88% chance that the Bank of England will raise its benchmark bank rate when it meets early next month.

The UK’s economy shows little sign of improving on lacklustre growth and it seems “extraordinary” that the Bank of England is considering raising interest rates, the British Chambers of Commerce said.

The chamber’s Quarterly Economic Survey of businesses, the largest of its kind, said sales at UK services firms that make up the bulk of the economy were steady in the third quarter.

However, there was little pick-up in pay pressures or investment, both of which the Bank of England expects to rise markedly next year. Overall the chamber described the survey as “uninspiring”, with political uncertainty, currency fluctuations, and Brexit clearly affecting British businesses.

Despite confounding forecasts that the 2016 vote to leave the EU would lead to a sudden slowdown, the UK’s economy has struggled this year, posting its worst first-half performance since 2012.

The chamber said price pressures in companies, while high historically, looked likely to peak soon.

“Against this backdrop, it seems extraordinary that the Bank of England are considering raising interest rates,” said Suren Thiru, BCC head of economics.

In September, the Bank of England said interest rates would probably rise in the coming months if the economy continued to develop and price pressures kept building. The chamber survey suggested business activity was probably strong enough to absorb slack in the economy — one of Bank of England’s markers for raising rates soon, said JPMorgan economist Allan Monks.

A majority of economists polled by Reuters think the Bank of England will move at its next meeting in November but most also said it would be a mistake to act now. Unlike the larger services sector, manufacturers had better domestic and export sales over the past three months, the chamber said.

While gauges of confidence in turnover and profitability stood at their highest levels since 2015, the UK survey pointed to only a marginal improvement in manufacturers’ investment intentions.

A slightly larger proportion of manufacturers said they expected to raise prices.

n Bloomberg and Reuters

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