Sterling’s mini-revival may be trumped by ‘Brexit confusion’

Sterling’s mini revival has brought some welcome relief to Irish exporters, but with the Brexit negotiations on a knife edge and UK growth still weak, the shift may be short lived, according to analysts.

The UK currency surged to a six-week high of 89p against the euro on Tuesday, spurred by a surprise jump in UK inflation to 2.9 per cent in August, which heightened speculation that the Bank of England may move to raise interest rates earlier than expected or at least signal as much when it meets on Thursday.

However, Merrion analyst Alan McQuaid believes the current uncertainty surrounding Brexit may trump any move to hike UK rates.

“It is, in my view, unlikely that the bank will adjust policy unless the pound is weakening independently, and this weakness is related to monetary policy divergence,” he said.

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After the Bank of England meeting on Thursday, Mr McQuaid said the focus would turn back to the political agenda.

“[Theresa ]May is expected to make two significant speeches over the coming weeks and this could help to sow more confusion than provide clarity,” he said.

“Being a minority government and relying on the Democratic Unionists for support means that May has to strike the right balance between the hard and soft Brexit camps,” he said.

“ The end result is that she might sow confusion instead. Remember, it was at her Conservative party speech last October that saw a sharp fall on the pound and a resulting flash crash on concerns over a hard Brexit,” Mr McQuaid said.

“So in summary, I would be positive on sterling in the near-term, but negative politics could see it weaken again in late September/October,” he said.

Last month, the bank's nine-member Monetary Policy Committee voted seven-two in favour of maintaining rates at the current level.

The risks of a third dissenter joining last month's two votes for a hike in the nine-member Monetary Policy Committee are growing, according to analysts at HSBC Holdings, ING Groep and Morgan Stanley.

A six-three split decision could drive up the odds of a November rate rise to 50-50, according to ING's currency strategist Viraj Patel, lowering the chances of sterling weakening to parity against the euro.

JP Morgan Asset Management's global market strategist Michael Bell differs. Rising inflation is "ultimately deflationary" as it squeezes real incomes, he said. With the UK's economic outlook "still skewed somewhat to the downside", Mr Bell said the market pricing of tighter BOE policy is "too aggressive."

Additional reporting by Reuters