Britain's pound steadied on Wednesday, holding just above a one-month low hit as investors grew concerned on whether entrenched expectations of higher UK interest rates were reasonable given a backdrop of uncertain Brexit negotiations. Noises around Brexit negotiations grew louder after finance minister Philip Hammond declared the government was planning for all possibilities, including Britain's leaving with no agreement on the terms of its departure.
However, that had little impact on sterling with the currency hemmed in tight trading ranges as investors worried that a sharp turnaround in sterling in the currency markets to net long positions may come under pressure. David Cheetham, the chief market analyst for XTB trading, warned that the high levels of speculative positioning risked weakening the pound.
"Recent events are unlikely to cause major downside for sterling on their own but they are weighing on the pound, and the alarming frequency with which they are occurring only increases the chances of another major political blow for the market," he said. Sterling was broadly flat at $1.3195 after two sessions of gains. It briefly hit a day's low of $1.3176 after Hammond's comments.
Strategists said the speech had only minimal impact with markets more focused on the strong data this week and broad expectations of interest rate hikes baked into the currency markets. "I don't think Hammond's speech about a 'no deal' is a major factor. Actions speak louder than words to the market. There has been virtually no practical preparation of a 'no deal' scenario," said Alvin Tan, an FX strategist at Societe Generale.
Despite falling projections for British economic growth, futures markets are pricing in 50 basis points of Bank of England rate increases over the next year, the most in the developed world apart from Canada. But the outlook appeared fragile, with some market watchers including such as Morgan Stanley preferring to sell sterling on rallies on Brexit worries. "Should the start of the UK-EU (post-Brexit) trade deal be postponed, UK inward investment may suffer," analysts at the investment bank said in a note.
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