Sterling rallied mid-last month after Bank of England Governor Mark Carney reiterated the central bank’s new view that interest rates are likely to rise in the coming months at the IMF’s headquarters on Washington. The fall in the value of the pound since the referendum has caused prices to jump to nearly 3 percent - above the BoE’s 2 percent target and has squeezed the spending power of many households and has slowed growth in the UK economy. To add to the hawkish sentiment, two of Britain’s “Big Four” banks also forecast higher UK interest rates over the coming year.
Sterling also strengthened off the back of rumours that Foreign Secretary Boris Johnson could quit if May favours paying for access to the European Union’s single market on a perpetual basis. Although Johnson later denied the claims, many investors have argued that Johnson’s resignation would free May’s hand in pushing through a softer Brexit which would be positive for sterling.
Investors now looked ahead to the Prime Minister’s hugely anticipated speech in Florence in which she was expected to set out her vision of a two-year "implementation period" to avoid the prospect of cliff-edge, and to outline a bespoke future trade model. A report published a day before the speech even indicated that May would signal the UK’s willingness to pay £17.65 billion to the EU in the months after Brexit conditional on access to the single market which eased concerns that she would opt for a softer Brexit.
However in the speech the PM revealed that a Brexit implementation period would last for around two years, but failed to deliver any further insight in to the heavily debated topic of the Brexit bill and the UK government’s willingness to pay.
Theresa May came under further pressure later in the month after a conference in which the Bank of England governor Mark Carney told the UK prime minister that her plans for Brexit would lead to weaker real income growth and there was nothing the central bank could do to mitigate the pain. With Mrs May sitting directly in front of him Carney said the central bank could only smooth the economic cycle rather than boost prosperity. He also re-iterated the Bank’s view that Brexit will inflict damage on the UK economy in the medium term by making it harder to trade with the rest of the EU. The next opportunity for a change in interest rates is the Bank's monetary policy committee meeting on 2 November
The pound then slipped to a three-week low last Tuesday after data showed construction sector activity tumbled in September, and as investors worried about political and economic uncertainty surrounding Brexit. Speaking at a conference Brexit minister David Davis said that Britain wants to negotiate an exit agreement with the EU but is ready to walk away with no deal, and that officials were “contingency planning” to make sure all scenarios were covered.
Investors are now becoming increasingly concerned that Theresa May could be ousted from her position as the U.K. prime minister after her speech last Wednesday, which failed to impress some of the most senior members of the cabinet. There are also worrying signals of disunity as well as leadership bids from rivals in the government some of which are in favour of a harder Brexit.
The dollar steadied close to its highest level in ten weeks on near the beginning of October, with strong U.S. wages data at the end of last week giving investors’ confidence that the Federal Reserve will hike interest rates in December. The greenback reached 14-year highs at the start of 2017, but it had spent most of the rest of the year weakening, as weak economic data as well as doubts over U.S. President Donald Trump’s ability to push through tax reforms weighed on the currency.
Since then, though, the dollar has recovered almost 3 percent against a basket of major currencies, on signs that Trump’s tax reform plans could be back on track, and on a firming-up of bets that the Fed will in December hike rates for the third time this year.
The closely watched non-farm payrolls report showed the first fall in U.S. employment in seven years, but investors reckoned that was down to the temporary effects of Hurricanes Harvey and Irma, and focused on the largest gain in U.S. wages since December.The dollar continued its bullish run yesterday as strong data from the U.S fuelled speculation of a rate hike by the Federal Reserve in December.