Bank of England Governor, Mark Carney, spooked the market on Thursday with comments about wages and inflation. He said that he doesn’t see interest rates moving higher until at least 2018, which the market interpreted as a negative sign. The monetary policy committee voted 6 to 2 against a rate hike, which was the same split as the previous meeting. Traders also took this to mean that the data is not pointing to a turnaround anytime soon.
The pound fell to 1.106 against the Euro, after trading as high as 1.1205 earlier in the day. Traders were speculating on an improving outlook and were clearly disappointed.
Meanwhile, sterling slipped to 1 .3112 against the USD dollar, after reaching an eleven-month high of 1.326 earlier in the day. This move came despite the dollar trading at a new 2-year low against most other currencies.
Where does this leave the pound going forward?
The euro is overbought and may be due for a correction in the short term, while the pound is now oversold in the short term. So, in the near term, it’s quite possible we will see the pound gain against the euro. The dollar is less predictable, with a non-stop flow of political noise - but it is oversold and may bounce back against global currencies.
In the longer term, the pound is extremely vulnerable. Uncertainty surrounds the country’s leadership, the type of Brexit deal that will be negotiated, and the economy. The next step in the process will be a speech by the Prime Minister in September, but given her failing support its doubtful that the speech will instil much confidence.
Certainty around Brexit negotiations will be a big positive for the pound, even if it is a ‘Hard Brexit’ – but that is probably six months to a year away.
Predicting a bottom for sterling is risky – but at some point, the fundamentals will turn positive for the pound. The combination of a cheap currency and growing certainty over the form Brexit will take, will provide a solid underpin for the currency. Some analysts believe we may see parity before that happens. That isn’t impossible, but rather than predicting the level, it will be safer to wait for more certainty before turning bullish on the pound.