Sterling caught in growth and Brexit trap

US President Trump and North Korean leader Kim Jong un have made it to the start line of a long and challenging marathon and financial markets’ reaction to the much awaited and historic Summit in Singapore has quite rightly been muted.

Markets are for now likely to refocus their attention on i) Escalating tensions between the US and major trading partners over import tariffs and the risk of an all-out trade war, ii) Federal Reserve, European Central Bank and Bank of Japan policy meetings this week; and iii) Tier-1 macro data, including in the United States and United Kingdom.

The Sterling Nominal Effective Exchange Rate has been remarkably stable since early May, stuck in a narrow 1%-wide range.

The receding risk of a “Hard” Brexit, including the UK’s early exit from a customs union with the European Union, along with the possibility that the Bank of England could hike rates in August have seemingly put a floor under Sterling.

At the same time markets – wrong-footed ahead of the BoE meeting on 10th May – are not getting carried away. Prime Minister May’s cabinet and parliament remain deeply divided and UK economic growth is soft with little evidence that it will pick up any time soon.

At this stage we see two potential turning points for Sterling:

  • The BoE meeting on 2nd August and quarterly inflation report publication; and
  • October-November when the House of Commons and European Parliament are scheduled to vote on the terms and conditions of the UK’s new trading relationship with the EU after it leaves on 29th March 2019 which includes a transitional phase due to end in December 2020.

Until then it is conceivable that monthly UK macro data and fluid Brexit-related negotiations will buffet a currency ultimately short on direction, in our view.

This is a summary – Read the full research piece here