Brexit might had gone away for a while, replaced by more prescient concerns such as the pandemic, slower economic growth, supply chain issues and higher inflation, but it is making a comeback. Tensions between the EU and UK over the Northern Ireland agreement could put an end to potential gains, analysts gave argued, while inflation worries could also put more pressure on the currency.
A weaker US dollar and falling US Treasury yields have also helped both the euro and pound rise. Despite higher wages in US inflation data and rate hike expectations, the US dollar fell from Wednesday’s almost one-year high.
Bank of England: First to raise interest rates
The pound was higher yesterday following data that showed the economy grew 0.4% in August, 0.8% smaller than February 2020, the Office for National Statistics said. Economists were expecting a monthly gross domestic product growth of 0.5% for August. The biggest impetus for the pound is the expectation that the BoE will be the first central bank to raise interest rates since the start of the pandemic, with some investors expecting a rise to 0.15% by December.
Sterling was at a two-week high on Monday due to weekend headlines that Bank of England governor Andrew Bailey, and MPC policymaker, Michael Saunders, warned of inflationary risks and the need to act, raising interest rates earlier and preventing inflation from becoming permanently embedded.
Analysts believe that the Bank of England's move towards raising interest rates will push demand for the pound higher. However, other analysts have argued that moving too early might risk economic growth, especially at a time when the growth outlook is subdued.
The positive news that Brussels plans to reduce checks on goods entering the region has done little to provide fresh impetus to the pound. The new plan, which seeks to resolve a dispute over a key part of the Brexit agreement, would remove about 80% of spot checks, while customs paperwork would also be cut by 50%.
However, UK Brexit Minister Lord David Frost’s demand to rewrite the Protocol to remove the oversight role of the European Court of Justice (ECJ) might create further tensions. On Wednesday, a UK government spokesman said both sides should start a new round of "rapidly conducted" talks to tackle such issues as governance, since a solution needs to be found that protects the Good Friday Agreement and strengthens the relation between the EU and UK.
Democratic Unionist Party (DUP) MP Ian Paisley told the BBC that Prime Minister Boris Johnson told him "personally that after agreeing to the protocol he would sign up to changing that protocol and indeed tearing it up, that this was just for the semantics".
Talks between the EU and UK on the new proposals might last for several weeks. Any renewed tensions and disagreements could spark more pound volatility.
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