Sterling falls as Brexit deal optimism fades

Sterling fell on Friday after the U.S. dollar rallied and investors began to doubt recent optimism about an imminent Brexit deal.

The pound has traded as high as $1.3176 this week, a three-week high, after Britain appeared to be edging towards clinching an exit deal with the European Union.

But work remains to be done before an agreement is reached, with both sides struggling to decide on a mechanism for avoiding a hard border separating Northern Ireland and Ireland.

The Northern Irish party which props up Prime Minister Theresa May’s government said on Friday that her negotiations had raised alarm bells and that it would not support a Brexit deal that divided the United Kingdom.

Sterling dropped as much as half a percent to as low as $1.2986, back to levels it stood at on Monday, with much of the fall coming after investors flooded into dollars.

That move followed the U.S. Federal Reserve reiterating that it would stick to interest rate tightening in the face of a strengthening labour market.

Third-quarter GDP numbers showed a 0.6 percent rise from the previous three months, in line with a Reuters poll of analysts, figures from Britain’s Office for National Statistics (ONS) showed.

The data suggested Britain’s economy has kept up healthy momentum, but this may prove a high watermark ahead of Brexit, and the numbers failed to elicit much response in the pound, British government bond markets or the UK stock market.

Economist George Buckley noted that business investment, which contracted a worse-than-expected 1.2 percent in the third-quarter, was the negative surprise.

It seems that Brexit uncertainty is exerting a larger negative influence on business investment as we move closer to a deal/no-deal being confirmed,” the Nomura economist said.

The pound also traded lower versus the euro, by 0.2 percent to 87.19 pence per euro.

Consensus already expects a strong 0.6 percent QoQ (quarter on quarter) and UK rates have already risen after the central bank press conference last week,” ING analysts said.

Unless we see a 0.7 percent QoQ print or higher, it will be difficult to see GBP/USD push towards $1.3200,” they said, citing the Brexit uncertainty that will limit any further repricing of future rate rises.

Money markets are currently pricing in one 25 basis-point hike from the Bank of England in 2019.

 

/reuters.com

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