The Dollar has recouped the small loss it posted yesterday ahead of the release of the Fed’s 26th September policy meeting minutes, appreciating versus developed currencies. Sterling was not immune, with the GBP/USD cross threatening to fall below 1.31 before staging a small recovery late in the session.
Sterling’s fall has been modest in the greater scheme of things, with the trade-weighted index only back to Monday’s levels. However, the release of a larger-than-expected fall in UK CPI-inflation from 2.7% yoy in August to 2.4% yoy in September – the bottom of an 18-month range – suggests that a Bank of England policy rate hike is now very unlikely before end-year, even if the UK and EU somehow manage to pull a rabbit out of the hat in the next few hours and announce that a post-Brexit deal is imminent.
Moreover, the likelihood of the EU announcing in the next 24 hours that it has failed to reach a post-Brexit deal with the UK could put Sterling under further pressure. EU leaders, bar British Prime Minister May, will meet later tonight to assess where Brexit negotiations stand but the unresolved issue of the Irish border, amongst others, will likely mean that a first deadline has been missed.
The question is what next and British and EU officials have tabled a number of possible scenarios, including an extension of negotiations to mid-November or even possibly December and a more drastic extension of the so-called transition period beyond December 2020. One scenario still on the table is that both sides will ultimately fail to bridge the gap in coming weeks, leaving the UK with the prospect of leaving the EU without a deal. The only certainty is that two-and-a-half years after the June 2016 referendum there is still a great deal of uncertainty, which has in turn left UK markets on a permanent knife edge.
