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Sterling steadies after recent boost

The pound flattened out today after hitting its highest levels in almost four weeks, speculation that the Bank of England will raise rates within the next year cooled by broader concerns about a Brexit-driven slowdown in the UK economy.

Sterling has surged 3 percent in the past week, driven by a turnaround in the dollar and BoE minutes last week that showed a number of policymakers on the verge of voting for a rise in rates.

Another jump in inflation numbers on Tuesday pushed money markets close to fully pricing in a rise in rates within the next 12 months to prevent another dive in the currency that would raise prices of imported goods further.

But many think the bank is simply using hawkish rhetoric on rates to address both sterling’s weakness and rising inflation expectations.
Analysts also point to the jousting with Brussels that is expected to accompany the start of EU exit talks next month as likely to weigh on the currency.

Several of the currency world’s top 10 banks, who were more cautious on the pound at the end of last year, have been aggressive again in the past month in predicting more declines, pointing to both the political risks of the Brexit talks and signs of weaker growth.

UK retail sales data on Thursday will be another test of whether and how quickly the economy is slowing. Dealers said sterling would struggle to pass $1.25 without another round of broader dollar weakness.

The big near-term risk is retail sales.

If higher inflation meets softer wage growth and triggers slower consumer spending at the same time as political uncertainty increases, I can’t see anything good for sterling, valuation and positions notwithstanding.

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