What goes up often comes back down

The Pound yesterday reversed some of its recent gains, as Bank of England Governor Mark Carney defended his recent actions in cutting interest rates and extending QE. At the inflation report hearings, Mr Carney said he was “absolutely comfortable” with the Bank’s decision to take action, and claimed preparations for the surprise Brexit vote had helped to steer the UK’s economy through the initial shock. Interest rate cuts and QE both tend to hurt the value of sterling, and yesterday we saw the Pound lose around a cent against both the Euro and US Dollar, the first losses after a positive few days’ movements. 

The Pound was also not helped by worse-than-expected manufacturing production figures.

More figures and Brexit talks today
Today sees the key European Central Bank interest rate decision, and more importantly the accompanying press conference given by Mario Draghi at 1.30pm. The ECB deposit interest rate is already at -0.4%, and Mr Draghi’s press comments usually contain strong hints as to the ECB’s forthcoming policy intentions, as well as analysis of the Eurozone’s current economic performance. Any buyers or sellers of the single currency should keep an eye on the Euro for potential movements this afternoon.

Theresa May is also due to meet EC President, Donald Tusk, for the first time since becoming Prime Minister, at Downing Street later today. These informal talks will set the tone for future negotiations, and are a precursor to EU talks next week, excluding the UK, where leaders will meet to discuss the future of the bloc and Britain’s withdrawal from it. Mr Tusk is a pragmatist who will look for solutions, but he will face growing pressure next week from the rest of Europe, to ensure that Britain does not have an easy exit which could lead to other countries following the UK out of the EU’s exit door.

So with tense negotiations ahead next year, we will see jockeying for position between the EU and UK for the rest of 2016. This is already a risk to the value of the Pound, as each side starts to set out its position, and exchange rates are likely to be sensitive to any potential disagreements.

A busy week for exchange rates is rounded off tomorrow with UK trade balance figures, and unemployment in Canada and Switzerland.

With the Pound having made significant gains in the last week against many currencies, yesterday’s fall back is a timely reminder that there is no plain sailing ahead for the UK, or therefore sterling, in the weeks and months ahead.