Worst week in a year for Sterling – 9th October 2017

Worst week in a year for Sterling – 9th October 2017

Given the pressure that has been developing on Theresa May from members of her own party (notably from the previous Tory Party Chairman last week), messages of support for Prime Minister Theresa May coming from both Cabinet Members and backbenchers are therefore being treated with suspicion. Since all Parliamentary business other than Brexit have been placed on the “back-burner” and as there has been very little progress with Brexit, it is not unreasonable to say that the Government is in a chaotic state. The knock-on effect has been a fall in Sterling.

Sterling’s performance last week illustrated perfectly that the market is losing faith in the ability of Theresa May to survive the hostility she is facing, let alone produce a Brexit that provides clarity and encouragement to British businesses. Sterling fell by 2.34% versus the US Dollar last week and close to 2% versus the Euro (despite the EU’s own political issues). There is a sense of “another day another rallying call” as Mrs May prepares to brief Parliament with phrases like “progress won’t always be smooth” and “we can prove the doomsayers wrong”. Unfortunately, the reality is beginning to look a lot different.

In the first week of next month, the Bank of England will convene its next meeting and the expectation of the market is that the Monetary Policy Committee will vote to raise interest rates. At the last meeting, the vote was 7-2 in favour of leaving rates on hold so a rate hike would be quite a turnaround. To say a rate hike will be a gamble is something of an understatement. A dramatically slowing economy needs to be balanced against inflation which will most probably break 3% this month and Sterling which has started to fall again as the market digests the headwinds facing other G7 currencies.

On Friday, the U.S. employment report once again proved its unreliability as the headline number showed that the economy shed 33,000 jobs in September although the August figure was revised up by close to 10%. This was well below market expectation but as is often the case with this data, the underlying numbers were surprisingly strong. The unemployment rate fell to 4.2%, well below the 5% level which used to be considered full employment and average hourly earnings rose by 0.5%.

This last piece of data reinforces the belief that the Fed will hike rates in December despite the assertion from their chairperson that they are no longer data-dependent when creating monetary policy. A pre-emptive hike in the short term is considered prudent by analysts to ensure that the pace and size of hikes doesn’t need to accelerate unnecessarily.


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