Dubai: Comments from British Prime Minister Theresa May soothed frayed nerves of traders in the currency market.
Sterling raced higher on Tuesday after the prime minister laid out a Brexit plan, jumping 2.87 per cent, its highest single day gain since October 2008.
May said that UK would leave the EU’s single market, but stressed that it would seek new international trade opportunities and be open to global trade, adding that the deal will go through a parliamentary vote.
“Today’s speech has given us some comfort that further strong sterling drops [1.15 and below] are less likely now, but we still have to wait for the responses from European politicians,” Constantin Bolz, currency analyst at UBS Wealth Management told Gulf News over email.
Sterling rose as much as $1.2389, up 2.87 per cent compared to previous close. This sharp recovery was from a low of $1.1979 seen on Monday.
“The Chinese President’s comment [in Davos] did not move markets. Before May’s speech, markets waited with positions in sterling on both sides,” Bolz said.
Weakness in dollar also added momentum to the rally in pound.
The dollar index fell 1.17 per cent to be at 104 after the US President-elect Donald Trump said that the greenback is “too strong”. The euro was up 1 per cent against the dollar.
“We do expect sterling to bottom around $1.20 in the next few months, as uncertainty around the final Brexit procedure remains high. Over the medium term, we expect a sterling recovery,” Bolz said.
Pound has been consistently losing its value against the dollar and has shed 12.4 per cent of its value since June 23. The currency hit a 30-year low of $1.1450 on July 10 due to a flash trade in an illiquid market.
But, in all, volatility in the currency would remain high.
“Pound volatility will likely remain elevated. While the economy is still profiting from the overall pound weakness, a stable monetary policy outlook suggests that the “hard Brexit” versus “soft Brexit” expectations will continue as main pound drivers over the next weeks,” said Christian Gattiker, Chief Strategist and Head Research, Julius Baer.
Appreciating pound, however, would boost inflation further, which in December hit its highest level in over 24 months. There will be a general rebound in inflation globally, given the oil price recovery, Bolz from UBS said.
“There is an imported inflationary boost which will feed further into UK inflation. How that would impact sterling depends a lot on the Bank of England’s reaction,” Bolz said.
“Overall, we believe that the recent strength of the UK economy and rising inflation will keep the Bank of England on hold — which is supportive for sterling,” he added.
Strong pound weighs on FTSE 100
A stronger pound weighed on UK equities, and especially on dollar-earning companies.
The FTSE 100 fell 1.07 per cent on Tuesday to be at 7,248.38, extending losses for another session.
However, the mid-cap FTSE 250 index, made up mostly of domestic companies, reduced losses to trade just 0.2 per cent lower.
