Will the Pound continue to rise versus US Dollar

Will the Pound continue to rise versus US Dollar

Since the EU summit held on 13/14 December the pound has risen virtually without correction. On the day confirmation was received that agreement had been reached to move the talks to stage two, Sterling traded at a low of 1.3167, its high in 2018 has, so far, been 1.3837 versus the US Dollar. Versus the Euro the move has not been replicated and the pound is trading at a very similar level.Of course, the optimism engendered over the move to stage two of Brexit talks has coincided with a period of dollar weakness. It therefore begs the question; will the pound (GBP) continue to rise versus the US Dollar (USD) or is Sterling’s castle “built on sand”.

Looking at the optimism that has been seen over the Brexit agreement, it seems to have been completely glossed over that that agreement was, in fact, close to a total capitulation. Furthermore, looking back towards last summer and autumn, any rally in the pound clearly coincided with periods of “consultation” where Brexit wasn’t making headlines. So, the first thing we should be aware of is that when talks start in early March it is entirely likely that the pound, irrespective of any macroeconomic data, will fall.


Inflation data still a major influence

The inflation data which was released on Tuesday confirmed that traders still see the possibility of a further hike in rates if prices continue to rise. That idea gains or loses traction as the gap between prices and wages changes.The small correction seen on Tuesday as inflation fell for the first time in nine months is illustrative but since it came at a time when the market was still in “bullish mode”, the effect was minimized. The employment report for the U.K. has been delayed until next week, adding to uncertainty and while there is nothing to indicate that average earnings will have increased, the gap is likely to have closed a little.

Producer prices hit the headlines when they rose in direct correlation to the fall in the pound following the Brexit referendum. As Sterling has risen, their rise has slowed, but now, their influence over future inflation could be a negative. Interest rate changes are now applied in such small increments but their influence over currencies remains the same. The producer price data that was released yesterday surprised to the downside but while commentators concentrate on the current inflation data, future inflation is predicted by these numbers to fall with the consequent effect on interest rate expectations and the pound.


So, Can the pound remain at these levels against the US Dollar?

Short answer? No.But, of course there is a caveat, there always is. The value of the dollar is collapsing and how much it can recover once it reaches a low will have a significant effect on Sterling.

However, I cannot see any reason to be excited about the prospects for either the Brexit transition period or the trade deal that is to follow. Theresa May and her Cabinet have displayed their desire for “any deal is a good deal” which is a change in mantra from “no deal is better than a bad deal”. Brussels simply cannot afford for the UK to have anything that can be construed as terms of access to the single market that;

  1. encourage further unrest or
  2. are more beneficial than other non-EU members access (e.g. Norway or Canada).

There is little reason to believe that these are “one time only prices but since the pound has reversed close to 50% of its post-referendum fall, it may not have that much more headway to the upside and those with dollars to buy could see this as an advantageous level to hedge.