Sterling jumps most in nine months on Brexit news, hawkish BoE

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2 November 2018


The Pound surged by the most in nine months on Thursday, boosted by encouraging Brexit news and the suggestion of a faster pace of interest rate hikes from the Bank of England next year.

terling spiked back above the 1.30 mark against the US Dollar to its highest level in over a week after investors latched onto the news that a deal between the UK and EU over financial services was close. This is a rare positive headline out of the Brexit talks since the October EU summit, which ended without an agreement. Comments from the Bank of England yesterday afternoon also suggested that the central bank could raise rates at a more aggressive pace in 2019 in the event of a smooth EU exit.

The Bank of England’s MPC voted unanimously to keep rates steady, as expected. The quarterly Inflation Report was on the hawkish side, stating that slack had fully disappeared from the economy and that inflation would remain above the 2% target during the forecasted horizon. Governor Mark Carney also stated that the MPC would keep a close eye on the impact of Brexit, stating that they may have to raise rates, even in the event of a disorderly Brexit or a ‘no deal’.

Thursday’s comments from the BoE reinforces our view that the central bank will raise rates in the second quarter of next year, after the UK’s EU exit date.

US Dollar fades on US-China trade deal optimism

The common currency also continued its impressive recovery yesterday, rallying back above the 1.14 mark against the US Dollar. This followed news out of the US that President Trump was hoping to resolve the recent trade conflict with China. According to a Bloomberg report, Trump asked US officials to begin drafting a trade deal with Beijing, with leaders of both countries expressing optimism over an agreement. Amid the trade dispute, the US Dollar rallied sharply as investors flock to safe-havens, while deem the US economy as mostly immune to trade disruption.

Today will be heavy in terms of economic indicator data. First up will be this morning’s updated PMI figures in the Eurozone, although these are expected to remain unrevised. Then we’ll have this afternoon’s US payrolls report. As always, we will be looking for signs of whether multi-decade low levels of unemployment are feeding through to higher wages.