When will the door close on the British pound?

The cautious signs of economic recovery and encouraging progress in the Brexit negotiations are opening the door to a rise in the British pound. However, it is only a matter of time before that door is slammed shut again.

De interest rate hike which the US central bank (Fed) implemented on Wednesday, March 21, leaves the currency world cold. The dollar even fell somewhat against the euro after the interest rate move. That indicates that traders had expected the Fed to hike rates by more than 25% or hinted that 2018 or 3 more hikes would follow in 4.

The British pound, on the other hand, is on the rise, despite the Bank of England leaving interest rates unchanged on Thursday, March 22. Within a few days, the currency appreciated by 1,5% against the euro.

Brexit troubles into the background
The recovery of the British pound hides several developments. One factor is that concerns about the impact of Brexit have temporarily faded into the background. Earlier this week, an agreement was reached on a transition period which runs from the official date (March 29, 2019) to the end of 2020.

The parties have also come a lot closer together on the rights of Europeans in Great Britain and vice versa. This removes the risk of a hard Brexit next year.

Economy in recovery
Signals of an improving British economy are also giving the pound a boost. On Thursday, March 22, it was announced that retail sales in February increased by 0,8%, compared to the previous month. That growth is twice as great as what economists were counting on.

In the month of January there was a further decline of 0,2%. Compared to 1 year earlier, the value was 1,5% higher. This is a signal of a cautious economic recovery. In recent months, economic data has mainly been dominated by inflation, which has been considerably higher than British wage growth.

Advance on interest rate hike
The growth figures prompted the Bank of England to allude to an interest rate hike later in the spring. Interest rate developments therefore still have an impact on the price movements of the British currency. Despite the prospect of an interest rate hike, it is not wise to take a position for a further appreciation of the pound. There are simply too many potential pitfalls in the negotiations for that.

Moreover, the position of British Prime Minister Theresa May is anything but certain. It is only a matter of time before political tensions rise and the pound comes under pressure again.

Lawrence Martins

Laurens Maartens is a currency expert at the Dutch Payment and Exchange Company (NBWM). Maartens analyzes current currency developments and also provides lectures and training in the field of currency management.

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