Brexit Driving The Pound Despite Increased Hopes For BoE Hike

The mood across the markets was upbeat despite the expected firing of the trade war gun tomorrow. The FTSE jumped higher in early trade and maintained the gains across the session, finding support from a positive open on Wall Street and a sudden drop in the pound.

A week of impressive pmi data and BoE Governor, Mark Carney expressing his confidence in a Q2 rebound for the UK economy, saw the pound push up to a ten-day high of $1.3275. This was all swiftly undone by Merkel inspired Brexit fears, ensuring traders make no mistake that Brexit not the BoE is driving the pound right now, even just a fortnight before a potential rate rise.

Comments by Mark Carney at a speech in Newcastle supported what recent data has shown us, that the UK economy looks set to rebound in the second quarter after a sluggish start to the year. 

Whilst Carney didn’t go as far as saying that the central bank should raise interest rates, he pointed in that direction, which was sufficient for trader’s certainty upped the possibility for a hike later this month, boosting the pound.

Still no workable Brexit plan

Sterling dropped over 0.5% in a matter of minutes after German Chancellor Angela Merkel rejected Theresa May’s plans for the post Brexit relations after a meeting today. 

This ramps up the pressure on Theresa May enormously just before she heads, with her waring Brexit cabinet, to the Chequers residence for the weekend in an attempt to make some progress. 

Time keeps ticking and the PM appears no closer to getting a Brexit deal, making it impossible for the pound to make any meaningful gains and putting $1.33 clearly out of reach.

FOMC minutes

The pound could struggle even more as traders look towards the release of the FOMC minutes later this evening. 

These minutes come from the June meeting where the Fed raised rates and also upped the expected path of rate rises to 4 across the year from 3. We therefore expect the Fed’s assessment on the economy to be encouraging and the minutes to be interpreted as hawkish. 

Traders will be paying particular attention to any clues in what it might take for the Fed to deviate from this steeper path of rate rises. So far the market isn’t on board with the 4 hikes across the year, should the minutes come across particularly hawkish then we could expect to see a solid push higher in the dollar as the markets start to price in more convincingly that 4th hike. 

In this scenario GBP/USD could be back towards $1.31 without too much trouble.