Sterling inched down against a broadly stronger dollar on Monday, holding close to the $1.30 level that has proved an anchor for the past month despite a series of negative headlines from the first weeks of Brexit negotiations. Banks are divided on the outlook for the pound for the rest of this year, with some forecasting more losses as the economy slows while others argue the worst of the market reaction to Britain's decision to leave the European Union is over.
It lost 0.2 percent to $1.2981 by late afternoon in London, while inching higher to 90.78 pence per euro. Signs that Britain's pro-European finance minister Philip Hammond was suspending hostilities with "hard" Brexiteers in the cabinet who want a cleaner break from the EU did little to shift prices.
"At this stage, the market does not expect the newsflow around Brexit negotiations to sound very positive," said Sam Lynton-Brown, a strategist with BNP Paribas in London. "But the longer it takes for the market to be able to price in a transitional deal, the more investors will have to prepare for a cliff edge scenario (in 2019)." Hammond and ardent Brexiteer trade minister Liam Fox set out a joint position in the Sunday Telegraph that a transition period was needed when Britain leaves the EU, but that single market membership would still end and the interim period would not be used to stop Brexit. Separately, one of the most vocal pro-Brexit campaign groups launched a campaign to oust Hammond from parliament, saying he was part of a plot to stop Britain leaving the European Union.
The pound reached as high as $1.3267 per dollar on August 3 on a brief surge in expectations that the Bank of England could raise interest rates over the next year. But the Bank's latest meeting and minutes quashed much of that talk in the market and a retreat in pricing on rates has weakened the pound since.
Inflation data on Tuesday and wage numbers a day later should be the centre piece of this week. If inflation rises to 2.7 percent, as expected, it will underline the pain being felt by households whose income is not rising as fast. A survey released on Sunday showed British employers expect to raise pay only minimally over the next 12 months despite hiring more staff, suggesting wage growth will remain a problem for consumer spending.
J.P. Morgan analysts recommended selling the pound in favour of the Swiss franc in a handful of new trades sent to clients on Friday. "The back-up in risk has exposed the rather tenuous basis for the dive in CHF and we take the opportunity to fade this vs GBP which is contending with an increasingly mediocre economy," said Paul Meggyesi, a strategist at the US bank.