FX focus: Pound climbs to 3% off post-Brexit low after fourth day of gains
Analysts warn pound rally could be short-lived as Bank of England could cut interest rates on Thursday.
The pound gained ground for a fourth consecutive session on Wednesday (13 July), with markets buoyed by hopes that Theresa May's appointment as prime minister would bring some much-needed stability to British politics following the Brexit vote.
As of mid-afternoon, the sterling was up 0.03% against the euro and 0.23% against the dollar, exchanging hands at €1.1974 and $1.3276 respectively. The gains mean the UK currency is now approximately 3% off its post-Brexit low, although it remains way below the €1.31 and $1.50 levels seen before the EU referendum.
However, economists have warned the rally could be short-lived, particularly given the Bank of England (BoE) could announce a cut to interest rates as early as Thursday.
"Volatility in the currency is far from over, and Thursday will be [Mark] Carney's most critical day as a governor when BoE meets for the first time post the Brexit result," said FXTM chief market Strategist Hussein Sayed.
"Markets expect the central bank to cut rates by 25 basis points, but the pound move will likely be derived on the guidance provided on how far the central bank can go with easing. A lower pound is probably sad news for UK importers and citizens planning for summer vacations outside the UK, but this is not the main concern of the Monetary Policy Committee."
Analysts at HSBC also poured water on the suggestion that a weak pound could boost exports, as was the case in 1992 and 2008. They argued that, because of Britain's still fragile economy, exporters would struggle notwithstanding the sterling's depreciation.
"Currency devaluation is no panacea," said Stephen King, senior economic adviser to HSBC. Japan shows that a fall in the currency doesn't lead you to the promised land of export growth."
Elsewhere, the yen snapped a three-day losing streak against the dollar, strengthening to ¥104.51 against the greenback, amid hopes that the Bank of Japan is preparing to loosen monetary policy further when it meets by the end of this month.
Meanwhile, the euro gained ground against the dollar and was trading 0.14% higher against the US currency to $1.1076.
© Copyright IBTimes 2024. All rights reserved.
