Sterling is likely to be driven this week by the state of Brexit negotiations and UK politics, after losing support from bets on central bank policy tightening.
The pound could see any slide exacerbated should it drop below $1.30, according to Morgan Stanley, with the resumption of Brexit talks, fallout from the Westminster sexual harassment scandal, and UK industrial data to provide direction.
The UK currency has fallen for three weeks on concerns about Brexit and as the Bank of England failed to signal the start of a tightening cycle after raising rates last week.
The market has pushed back bets on a hawkish central bank, which had provided a floor for a currency depressed by mixed economic data and the lack of agreement with the EU.
The UK is now looking for a breakthrough on key s ticking points before a EU summit in December, to try to move toward talks on a future trading relationship.
“The BoE has removed a key support for the pound,” said Georgette Boele, a currency strategist at ABN Amro Bank in Amsterdam.
“Brexit-related news will likely give sterling more direction in the coming weeks,” she said.
BoE governor Mark Carney said the next rate shift could depend on the outcome of Brexit. Money markets are now pricing in another 25-basis-point rise in September 2018. That could coincide with any Brexit deal, with the EU’s chief negotiator Michel Barnier wanting it finalised by October next year.
While officials resume talks in Brussels on Thursday, the UK government may be distracted by a sexual harassment scandal in Westminster, which has already brought down one senior cabinet minister.
With UK prime minister Theresa May’s judgement being questioned and the government only having a slim majority in parliament, the issue is on traders’ radar as a tail risk for the currency, according to Nomura International and Mizuho Bank.
Sterling held its ground at $1.3070 in late trading in London on Friday. And with the process of leaving the EU casting uncertainty, some economists have warned the BoE rate hike is a mistake.
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