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Deal Likely

Sterling gained this morning, putting it on course for its second-best week of 2018 on optimism for a Brexit deal and signals from the Bank of England that if the exit from the European Union is smooth more interest rate hikes could be on the way.

The pound enjoyed its best day of the year yesterday as markets priced in the possibility that a Brexit deal will be clinched in the coming weeks – removing a major uncertainty overshadowing the economy and the BoE as it tries to bring inflation back to target.

Once the MPC (Monetary Policy Committee) gets the Brexit ‘green light’, we expect two hikes in 2019, in May and November – sooner, and by more, than markets expect.

Money markets are not fully pricing in a full 25 basis point rate hike from current levels of 0.75 percent next year, however, underscoring investors’ worries about whether a disorderly Brexit can be avoided.

The British government and EU officials have played down hopes for an imminent Brexit deal, emphasising that while an agreement is close the two sides still have work to do.

Any agreement with Brussels would then need to win approval from British parliamentarians before the Brexit date of March 29, a far from easy process given factions with Prime Minister Theresa May’s Conservative party oppose her plans.

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