The key factors that are holding the Pound at current levels are political uncertainty and a lack of clarity over Brexit. The need for a stable government is a must, but particularly when we are in the midst of the most important negotiations for the UK in the last fifty years. Internal fighting in the Conservative party is causing a drop in investor confidence.
Grant Shapps, Former Conservative party chairman has stated there are up to thirty party members who are calling for a leadership election. Although this is not enough to force the issue, if more members joined the rebellion and this became a reality I think there could be a sharp drop in Sterling value. Key issues in Brexit talks need to be addressed in order for a significant Sterling rally such as trade and citizens rights.
Is there a UK interest rise on the cards
Mark Carney, the governor of the Bank of England, has given an indication there is the strong possibility of a UK interest rate hike in the coming months. There is now a 77% chance of a hike on 2nd November. I would expect this to be largely factored into current rates as the market moves on rumour as well as fact. I would expect a rise of 0.25% in the interest rate if it does occur.
I am however dubious this hike will take place. Mar Carney could be using a method known as jawboning, talking up the value of a currency rather than making a change to monetary policy. Take note the Monetary Policy Committee (MPC) voted 7-2 in favour of keeping rates on hold this month, the MPC are the decision makers, could there really be such a significant change in stance.
Justification for the hike is sketchy. Unemployment is being lauded best the best levels since the 70’s, but you need to take into account zero hour contracts have been added to the equation which are not the most stable form of employment. Inflation is currently at 2.9%, inflation can only be considered as healthy if average wage growth is growing at a similar pace. Average wage growth has actually fallen to 2.1%.
Catalonia independence could cause Euro weakness
If you are hoping for an improvement for Sterling the situation in Spain could create an opportunity. With many Catalans in favour of independence the Euro could lose value. The recent referendum has shown firm support for a break from Spain but it is not being officially recognised by the Spanish government.
If a break from Spain does become realistic the Euro could weaken substantially. This is becoming more likely as Catalan President Carles Puigdemont and other regional leaders have signed a declaration of independence this week.