Pound rally slows as former policymaker warns against rate hikes

The resurgence of the pound eased yesterday and Sterling experienced strong losses versus some of its peers after a warning from a former member of the Monetary Policy Committee (MPC).

GBP/EUR has this morning slid -0.3% to €1.1367, while GBP/USD has dropped -0.5% to $1.3372. GBP/AUD has weakened to A$1.7024, GBP/NZD to NZ$1.8616, and GBP/CAD to C$1.6539.

What did the former MPC member say to upset the pound? Read on to find out…

What’s been happening?

After Monday’s strong recovery, the pound was on a more mixed footing yesterday. The appeal of Sterling began to wane again as fresh concerns over the Brexit negotiations weighed on investor sentiment.

Theresa May held a meeting with European Council President Donald Tusk yesterday, which Tusk described as constructive and more realistic in tone. However, he also stated that the negotiations had not yet made sufficient progress to enable talks regarding future trade relationships between the UK and the EU to begin.

Additionally, markets were unsettled after former member of the Monetary Policy Committee (MPC) David Blanchflower warned that there was ‘absolutely no basis’ for the Bank of England (BoE) to raise interest rates in the short term.

Writing in the Guardian, Blanchflower claimed that the uncertainty created by Brexit was only going to drag further on the economy and that ‘Britain is the sick man of Europe’.

Political tensions in Germany continued to weigh on market appetite for the euro yesterday. Angela Merkel aims for greater Eurozone integration – which would improve the stability of EUR – but with her having to go into a coalition with minor parties her plans may be diluted or put on hold.

Although the US consumer confidence index fared worse than forecast, falling to 119.8 and seeing the previous score revised down to 120.4, the US dollar was able to make bullish gains yesterday.

Federal Reserve Chair Janet Yellen gave a speech in which she defended the idea of raising interest rates again soon, stating that it would be ‘imprudent’ to leave borrowing costs on hold to wait for inflation to move closer to the Fed’s target.

What’s coming up?

The Confederation of British Industry (CBI) will release retail data covering September later this morning. Evidence of strong sales growth will soothe fears over the extent that surging inflation is lowering household spending and dragging on the economy.

There is nothing major on the Eurozone data calendar today, but the euro could still experience weakness thanks to the focus on German politics.

The US dollar could receive a further boost today from August’s preliminary durable goods orders data. After tumbling -6.8% in July, orders are expected to have increased 1% last month.