Pounds relief rally does not strengthen its foundations
Theresa Mays first big speech on Brexit since she became prime minister removed some of the political uncertainty that has dogged the pound. However, the messiness of the politics of Britains exit from the EU still tops the list of reasons why sterling will remain under pressure.
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An era of sustained currency weakness suggests a lower standard of living as higher import prices and a rebound in dollar-denominated commodities fuels inflation, hitting UK consumers.
We see a deterioration in political rhetoric around Brexit as a key catalyst for further sterling weakness is how analysts at Deutsche Bank sum up the outlook for the pound. The large terms of trade shock from full exit from the single market could see sterling fall to $1.06 and close to parity with the euro.
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While that propelled the pound towards $1.24, a rise of nearly 3 per cent on the day, the prospect of a hard Brexit looms large. Also helping the pound was sentiment souring towards the US dollar after Donald Trump expressed his concern over a strong greenback. His plans to revive manufacturing jobs and US exports faces a headwind from dollar strength, another throwback to the Reagan era.
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The pounds jump against the dollar on Tuesday is a reminder the currencys trend lower will not be a straight line. However, the best case for the pound is that a further decline is closer to a steady walk down, rather than taking an escalator sharply lower.