At the end of the year, the pound risks tripping over barriers

Important decisions of the British authorities and the Bank of England raise questions about the future fate of the currency.
Episodic speeches by Theresa May influence the dynamics of markets, so investors should closely monitor the behavior of sterling on the eve of the Friday’s speech of the premier in Florence. Last year, after May’s two speeches on the subject of “hard” Brexit in the Tori conference, the pound fell by more than 4% (also during that week the flash currency crash happened). In January, the day of her speech at Lancaster House, the currency rose almost 3%. Then the market participants regarded May’s speech as an explanation of her position regarding the “divorce process”.
The Prime Minister’s speech scheduled for this Friday will be no less important for investors. As part of this event, it is expected that the British government will present the transaction plan for a 2-3-year transition period after the official Brexit in 2019. This plan should affect the delicate financial issue within the framework of a “divorce” from the EU. As the markets positively assess the prospects for the transition period, the rebound of the pound is likely. Another surge up, in addition to a 5% jump in the rate above $ 1.36 in the first two weeks of September, in response to the hawkish tone of the Bank of England, will mark a further recovery of the currency from the level of $ 1.26 reached in early summer.
But does the growth of the pound seem more than 10 cents in just three months? Investors seem to be tired of talking about the low exchange rate of the currency and consider it undervalued, against which some banks admit that they went too far with pessimistic forecasts. The growth of sterling above $ 1.35 looks quite justified “at this stage,” says economist UBS John Raith. But there are three reasons why investors should adhere to a more conservative forecast.
Firstly, a very large contribution to the strengthening of sterling is made by the weakness of the dollar, so that market participants will not fail to assess the chances of a dollar rally in case the Fed raises rates and takes a reduction in the balance, and the government implements tax reform. “There is heightened uncertainty about the dollar,” emphasizes Jane Foley, an analyst at Rabobank.
Secondly, political issues will not disappear after one May speech, especially given that markets and the public believe that it has already lingered in the prime minister’s chair.
Thirdly, the Bank of England, which intended to raise the rate before the end of the year, “definitely risks”, as wages remain anemic, and economic growth slows down.
After the events of 2016, this year the pound looks much more solid, rising by 9%. But 2017 is not over yet

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