A boost for European markets from France was not enough to drive sterling past $1.30 on Monday, with the British currency trading in tight ranges as domestic attention focused on this week’s Bank of England meeting and an accelerating election campaign. The pound has gained more than 3 percent since Prime Minister Theresa May called a surprise early national vote three weeks ago on June 8, reflecting hopes among investors it will give her a stronger hand to compromise in Brexit talks. Yet that recovery has stalled in the past week, even as May’s Conservatives won a decisive victory in regular local council elections on Thursday.
That hints at the scale of doubts that remain on how the UK economy will deal with a historic break from Europe and what are widely expected to be volatile talks on the terms, whatever the outcome of next month’s vote. “There is no reason for the pound to really gain at the moment because every time it does you have to stop and say that the risks ahead are still tremendous,” said Esther Reichelt, a strategist with Commerzbank in Frankfurt.
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“If you look at pricing, the market is remarkably calm with regard to the election. That ignores that a lot of the risk is with the EU and that it may be hard for May to achieve a lot of what she is promising.” By 0758 GMT, the pound traded flat at $1.2982, having hit a high of $1.2990 for the second time in as many trading days. It gained 0.4 percent to 84.39 pence per euro as an overnight burst for the single currency after Emmanuel Macron’s win in the French presidential election faded.
The Bank of England meets on Thursday, with analysts expecting it to have drawn some comfort from sterling’s rise over the past month. The Bank surprised markets earlier this year by delivering a hawkish message on the chances of rises in interest rates, generally read as reflecting concern that further falls for pound would boost inflation and weaken consumer spending power.
With the currency stronger, it should feel freer to let forecasts for inflation over the next two years drift above its 2 percent target without taking away some of the emergency monetary support it has put in place for growth, analysts said. “Since the Feb Inflation Report, growth has disappointed expectations a little and inflation has exceeded the Bank’s forecast a little,” RBC Capital Markets global head of FX strategy Elsa Lignos said. “But we think the MPC is likely to continue to tolerate a forecast for above-target inflation by exercising the flexibility in its remit.”
By Patrick Graham (Editing by Alison Williams)