Can the British Pound Regain Its Upward Momentum ?

In mid-September 2017, UK Prime Minister Theresa May reassured European leaders in Florence that the country will remain “unconditionally” committed to the collective defense of Europe and will work with all member states to counter terrorism and deal with natural disasters, even after leaving the European Union.

Her tone was more accommodating and positive than the one she has used in recent months, which has undoubtedly changed the overall atmosphere of the discussions.  

From the perspective of the EU, the fourth round of Brexit negotiations ended on September 28th with a new dynamic that is positive for futures talks and could help the parties make progress in dealing with existing obstacles, so the UK’s exit can be as smooth as possible.

This is expected to help the British pound to rise since there will be less concern over the possibility of a ‘hard Brexit’.

However, many Brexiteers, including some in the Prime Minister May’s Conservative party, saw her Florence speech as a capitulation to EU demands for a ‘divorce bill’ that could amount to tens of billions of euros.

At the Tory conference in Manchester this week, Mrs. May’s performance was widely seen as uninspiring, and dozens of Conservative MPs are now urging their leader to resign.

This would leave open the possibility that popular backbench MP Jacob Rees-Mogg, one of the most outspoken supporters of Brexit, could become the new party leader and Prime Minister.

This would throw negotiations with the EU into disarray, since most “Leavers” are opposed to paying anything to the EU and, in the absence of a trade deal, want the UK to return to WTO rules.

The British pound was one of the top-performing currencies in September, hitting a 15-month high. The Bank of England’s Monetary Policy Committee (MPC) decided on September 13th not to change course, leaving its main interest rate (the Bank Rate) at 0.25%.

2 members out of 9 voted for an increase in interest rates in September, but the majority agreed that if the British economy keeps to the path described in the August Inflation Report, monetary policy should be tightened.

The market prices indicate the first rate hike in 10 years may occur in November, but the BoE noted: “any prospective increases in the Bank Rate would be expected to be at a gradual pace and to a limited extent”.

Some monetary stimulus should also be withdrawn in the coming month, as the BoE has a stock of UK government bond purchases totaling £435 billion and reserves of sterling non-financial investment-grade corporate bond purchases worth £10 billion.

A central bank is an authority that has a major impact on any currency and the Bank of England is unquestionably the dominant force for the pound right now, with hints of a Bank rate hike helping the sterling to rise.

Every time central bank plans on tightening its monetary policy, the associated currency goes up because investors are looking for the best returns. The pound stands to benefit from actions taken by the BoE, as well as from smoother Brexit talks with Europe.

If the negotiations take a sudden twist, however, there could be major volatility on the GBP/USD and EUR/GBP pairs. You can take advantage of all the pound’s movements by opening positions using currency trading brokers worldwide like UFX.com.

What are your thoughts, do you think British Pound will regain its momentum?  Share your thoughts and comments below.

Cheers!