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The only way is down for UK interest rates, say City economists

The UK economy is in contraction mode, but the Bank of England isn’t greatly worried. GDP fell by 0.2 per cent by the second quarter of the year as Brexit uncertainty and a global slowdown held growth back.

Policymakers at the BoE are reluctant to fiddle with interest rates as the Brexit date of 31 October looms. New Prime Minister Boris Johnson has made it abundantly clear that Britain could be crashing out of European Union without a deal.

Noises from the British economy last week will have comforted bosses at the Bank and cemented their “wait and see” position. Inflation was shown to have picked up to 2.1 per cent, wages grew at their fastest pace in 11 years, and July retail sales delivered a pleasant surprise.

It looks, then, like only the shock of a no-deal Brexit would cause Threadneedle Street to tamper with rates, which currently sit at 0.75 per cent. Yet the BoE has repeatedly said that in such an event rates could move “in either direction”.

City economists are not convinced by this argument from Mark Carney and co, however. Peter Dixon, economist at Commerzbank, says: “There would appear to be no good arguments in favour of a hike”.

The Bank’s logic is that a tumbling pound could push up the cost of imports and drive up prices. But Dixon says the effects would only be felt “over a six to 12 month horizon”.

Eventually, he says, the BoE will have “to weigh up” the risks to inflation versus the risks to growth. “But that will not be a calculation they have to make anytime soon”.

Oliver Blackbourn, portfolio manager on the multi-asset team at Janus Henderson, concurs. “In the higher-inflation, lower-growth environment expected,” he says, “the Bank of England will choose to primarily worry about the latter”.

He says lower availability of goods, services and workers for industry as well as consumers worrying about their incomes will weigh on economic growth. “This is likely to be the Bank’s main focus in its decision making.”

Turning the taps back on

Institute of Directors chief economist Tej Parikh says: “The precise shape of a no-deal Brexit and the scale of the government contingencies will play into the Bank’s final decision.”

Sajiv Vaid portfolio manager at Fidelity International takes a similar view, saying that in the event of a no deal, “the lesson to learn is that you cannot rule anything out”.

The shock could be so severe that policymakers might turn to the bazooka of stimulus bond-buying, or quantitative easing (QE), rather than the pistol of interest rate cuts. In even the relatively benign scenario modelled by the International Monetary Fund (IMF), Britain would enter a recession in 2020 and unemployment would rise by 1.5 percentage points.

Dixon says: “The BoE can always resume asset purchases. After all, the BoE balance sheet is only around 28 per cent of GDP – a full 10 percentage points lower than [European Central Bank] levels”

Government help

Craig Erlam, senior market analyst at foreign exchange firm Oanda, says a no-deal Brexit would force “at least one rate cut and perhaps additional quantitative easing”. He says the Bank will be hoping that “unlike in the aftermath of the crisis, the government also plays a role in providing an economic buffer”.

Vaid agrees. “I think this time will be different and expect fiscal policy to play its part,” he says. Blackbourn also says he thinks rates would be lowered, “likely alongside a large fiscal easing from the government”.

Almost all economists disbelieve the Bank when it says interest rates could move either way if a no-deal Brexit comes around. Blackbourn says: “Despite the inflation-targeting mandate, the Bank’s first reaction will be to support growth and later worry about inflation.”

By Harry Robertson

Source: City AM

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Unexpected inflation jump puts pressure on Bank of England

The Bank of England is set to come under pressure to control price growth after inflation in July came in at 2.1%, significantly above analyst expectations.

The figure, released by the Office for National Statistics (ONS) on Wednesday, follows bumper wage growth data earlier this week.

Analysts had predicted that the consumer price index, the measure of inflation used by the Bank of England and the government, would fall to 1.9%, or slightly below the Bank of England’s 2% target.

But the 2.1% growth in prices now suggests that record-low unemployment and high wage growth have now translated into higher consumer spending.

The ONS said on Tuesday that average weekly wages jumped by 3.7% in the year to June, the highest increase in more than a decade.

The Bank of England earlier this month forecast that inflation would fall below 1.6% in the final three months of the year, in part because of lower energy prices.

But the steep decline in the value of the pound in recent weeks has increased inflationary pressure in the UK, largely because it has raised the cost of imports.

The ONS said that higher prices for hotels, video games, and consoles combined with a decline in summer clothing discounts were responsible for the uptick in inflation.

Inflation in June had already hit the bank’s target.

Though markets expect the Bank of England to hold rates steady before the 31 October Brexit deadline, above-target inflation would normally prompt the bank to hike interest rates.

“The latest data will not change the position of the Bank of England, which is committed to keeping interest rates on hold at least until more clarity is provided on Brexit,” said Mike Jakeman, an economist at PwC, in a note on Wednesday.

The data, however, “could well be seen as supporting a hike,” said David Cheetham, chief market analyst at XTB.

Core inflation, which excludes energy, fuel, alcohol, and tobacco prices, also came in above expectations, climbing to a six-month high of 1.9%.

Another measure of inflation, the retail prices index, fell to 2.8%, from 2.9% in June.

That figure is used to determine the extent to which rail prices will be increased from January, meaning that commuters will face a £100 hike in season ticket costs.

Inflation has climbed since the June 2016 Brexit referendum, which prompted a 10% fall in the currency’s value.

The pound had its worst month since October 2016 in July, and earlier this month plunged below $1.21 (GBPUSD=X) for the first time since January 2017.

In normal times, surging inflation would see the bank tighten monetary policy, mostly by increasing its benchmark interest rate.

But the bank is expected to ease its policy stance — in part by lowering rates — in the event of a no-deal Brexit, because the economy will likely need a boost.

Under current guidance from the bank, which assumes that there will be an orderly exit from the European Union in October, the bank has said that it expects to gradually increase interest rates.

By Edmund Heaphy

Source: Yahoo Finance UK

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Bank of England: juggling weak growth, higher inflation and Brexit

The Bank of England (BoE) again left interest rates unchanged at 0.75%, despite the headwinds buffeting the UK economy. The Bank didn’t follow the Federal Reserve and European Central Bank in turning more dovish, though economic growth is expected to be weaker than previously forecast this year and next. The Bank appears to be caught between a weaker near-term growth outlook and expectations that inflation will rise above the 2% target over the next three years. As markets are clearly pricing in interest rate cuts, the Bank is forced to expect rising inflation over the forecast period, despite their own indications that they intend to raise interest rates.

Despite recent commentary from UK government ministers, the Bank of England continued with its assumption of a smooth Brexit transition. The Bank continues to find itself entangled in a web of planning for ‘no deal’ but being unable to use this as an assumption in its own forecasts. This is creating significant inconsistencies between its outlook and the market forecasts that feed into it. Some Monetary Policy Committee (MPC) members have recently provided their opinions on the outlook in the event of ‘no deal’ but the need to remain apolitical continues to prevent the wider committee making a decisive assumption. However, as Governor Carney commented, a no deal Brexit may require a range of different responses depending on the actual outcome and future relationships. A shift to a ‘no deal’ assumption remains potentially the most obvious catalyst for a shift in the Bank’s interest rate forecasts, though this itself comes with additional political risks in the assumptions made.

At some point, if global growth continues to slide and Brexit-related uncertainty remains an additional drag, the Bank might be forced to change its forecasts anyway. In the meantime, the fog of Brexit continues to pervade the decision-making of every UK institution and corporate. This is likely to weigh on sterling and gilt yields in the near term, though breakeven rates may continue to drift higher, in contrast to other major sovereign bond markets.

BY ANDREW SULLIVAN

Source: IFA Magazine

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Bank of England Holds Interest Rates, Warns of Possible Brexit Recession

The Bank of England has voted to hold interest rates at 0.75%, while issuing a grim forecast about the impact of Brexit on growth and the value of the pound.

As anticipated, the nine-member monetary policy committee (MPC) voted unanimously to hold interest rates at 0.75%. They were last revised up a year ago.

However, the Bank’s forecasts for growth were more pessimistic than expected.

With Brexit negotiations dragging on, the chance of a no-deal exit rising, and as the pound plunged, reaching a two-year low this week, the central bank predicted zero GDP growth in the second quarter—before the UK even departs the EU.

The bank’s quarterly inflation report, issued Thursday, also warned there was a one in three chance of a negative growth—a recession—by 2020.

The Bank cited “entrenched Brexit uncertainties” along with escalating international trade tensions and a global economic slowdown, as reasons for the dour forecasts.

“Since May, global trade tensions have intensified and global activity has remained soft. This has led to a substantial decline in advanced economies’ forward interest rates and a material loosening in financial conditions, including in the United Kingdom,” the Bank’s Monetary Policy Committee said.

“An increase in the perceived likelihood of a no-deal Brexit has further lowered UK interest rates and led to a marked depreciation of the sterling exchange rate.”

The recent spiral in the pound—the worst performance of any major currency in the month of July—has been linked to new Prime Minister Boris Johnson’s commitment to leave the EU, deal or no deal, in 100 days.

“These asset prices reflect market participants’ perceptions of the likelihood and consequences of a no-deal Brexit,” the Bank said.

A no-deal exit would send the pound crashing still further, with inflation rising and GDP growth slowing further, the Bank warned.

However, the Bank said it did believe a deal with Brussels, and a smooth Brexit transition, could still be reached—reflecting official government policy to continue pursuing a managed exit.

In that case, the bank said it would likely raise the bank rate over the next three years to combat inflation.

“Assuming a smooth Brexit and a recovery in global growth, a significant margin of excess demand was likely to build. Were that to occur, the MPC judged that increases in interest rates, at a gradual pace and to a limited extent, would be appropriate,” the Bank said.

But while the government is still officially targeting an agreement with Brussels, there are suggestions it is expecting to leave without one. Johnson ally Michael Gove, in charge of no-deal preparations, said earlier in the week that the government was “operating on the assumption” of a no-deal exit on 31 October.

Source: Money Expert

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Home-buyer mortgage approvals at five-month high in June

The number of mortgage approvals being made to home-buyers jumped to a five-month high in June, Bank of England figures show.

But annual growth in consumer credit, which includes borrowing using credit cards, overdrafts and personal loans, slowed to its weakest level for more than five years.

Some 66,440 mortgages were approved for house purchase in June – the highest total since January, the Bank’s Money and Credit report showed.

Meanwhile, consumer credit increased by 5.5% annually in June, down from 5.7% in May, marking the weakest 12-month growth since April 2014.

The Bank said annual growth in consumer credit has fallen steadily since a peak in late 2016.

Howard Archer, chief economic adviser at EY Item Club, said: “Despite being at a five-month high of 66,440 in June, mortgage approvals were well in the 63,000 to 68,000 range that has broadly held since late 2016.

“They were also not that far above the average of 65,267 seen over the first half of 2019.

“June’s mortgage data tie in with the view that housing market activity got some help from the avoidance of a disruptive Brexit at the end of March, but the overall benefit has been relatively limited.

“Improved consumer purchasing power and robust employment growth has also recently been helpful for the housing market but latest developments have been somewhat mixed, with employment growth in particular showing signs of slowing.”

Commenting on the consumer credit figures, Mr Archer said households “have seemingly become relatively careful in their borrowing amid concerns over the economic outlook”.

He continued: “It is also evident that consumer credit growth has recently been limited by markedly weaker private car sales as this has reduced demand for car finance.

“Meanwhile, lenders have become more careful about advancing unsecured credit – the second quarter of 2019 saw lenders further reduce the amount of unsecured credit available to households and again tighten lending standards.”

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “Monetary indicators provide reassurance that the economy isn’t grinding to a halt ahead of the October Brexit deadline.”

By Vicky Shaw

Source: Yahoo Finance UK

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Unchanged interest rates amid Brexit uncertainty, predicts EY

Despite recent expectation that the Bank of England could either raise or even cut the UK interest rates, EY’s economic analysts have predicted the will likely remain the same.

As recently as June, the focus on UK monetary policy has been when the Bank of England is most likely to raise interest rates.

A turnaround in sentiment, however, has led some to believe the Bank of England could be just as likely to cut them.

According to EY’s ITEM (Independent Treasury Economic Model) Club, it would be a surprise for the Monetary Policy Committee (MPC) meeting to result in anything other than a unanimous 9-0 vote in favour of keeping UK interest rates at 0.75%.

Howard Archer, chief economic advisor to the EY ITEM Club, said: “We expect the Bank of England to keep interest rates unchanged at 0.75% on Thursday following a unanimous 9-0 vote of the Monetary Policy Committee (MPC) at their August meeting. This would match the outcome of the MPC’s last meeting in mid-June.

“However, a fair amount has changed since the last MPC meeting in mid-June and this will lead to a lot of interest in the tone of the minutes of the August meeting as well as in the new growth and inflation forecasts contained in the simultaneously released Quarterly Inflation Report.”

The direction interest rates move hinges on Brexit developments. Should the UK leave the EU with a deal in place, the EY team expects that the current rate of 0.75% will remain the same well into 2020, and gradually rise in-line with a slowly growing economy.

The expectation is that the Bank of England will acknowledge the recent increased risk facing the UK economy due to uncertainty surrounding Brexit, but are unlikely to react by cutting interest rates unless there is a damaging ‘no-deal’ Brexit in October.

“Increased belief that the Bank of England’s next move will be to cut interest rates rather than increase them is the consequence of a number of factors,” said Archer. “These include the weakened performance of the UK economy in the second quarter, domestic political uncertainties, a slower and more uncertain global economic environment which is expected to see the Federal Reserve and ECB shortly cut interest rates, and Brexit uncertainty.”

“If the UK ultimately leaves the EU without a “deal”, the Bank of England has repeatedly held to the view that interest rates could move in either direction.”

The view mirrors Bank of England Governor Mark Carney’s comments saying that the prospect of a no-deal is slowing down economic growth, and that the BoE would likely be required to provide stimulus to the economy should a no-deal occur.

Speaking to MPs, Governor Cerny said: “It’s more likely we would provide some stimulus. We have said we would do what we could in the event of a no-deal scenario but there is no guarantee on that.”

“There is not a business investment boom going on in the country right now. I think we all know why that is not the case.”

The fear of further Brexit uncertainty is also reflected in economic predictions. The likelihood is that further delay in leaving the EU could also lead to a cut to interest rates, or at the very least a long delay before any hike.

Archer said: “If Brexit is delayed again – most likely until the end of March 2020 – we expect the Bank of England to hold off from hiking interest rates until further into next year as it gauges how the economy is performing after the UK’s exit from the EU.”

By Chris Jewers

Source: Accountancy Age

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Bank of England’s Haldane ‘very cautious’ about cutting rates

Bank of England chief economist Andy Haldane sought to push back against market bets that the central bank’s next move will be an interest rate cut, saying he would resist lowering borrowing costs unless there was a sharp downturn.

Haldane contrasted the BoE’s stance with that of the U.S. Federal Reserve and the European Central Bank – both of which are expected to loosen policy – and stressed again that even a disruptive no-deal Brexit would not bring an automatic rate cut.

He acknowledged that business investment was “strikingly subdued” as companies struggled with Brexit uncertainty.

“My personal view though is that I would be very cautious about considering a monetary policy loosening, barring some sharp economic downturn,” he said at an event for local businesses in Scunthorpe, northern England.

BoE Governor Mark Carney and others have also deflected the idea that the Monetary Policy Committee is thinking of cutting rates while a Brexit deal remains possible.

They say the pricing of rate futures has been distorted by the risk of Britain leaving the EU without a transition deal on Oct. 31, creating a tension between their forecasts and market assumptions.

“Monetary policymakers are often cast as one-club golfers. In the current conjuncture, the problem is more that the MPC does not know which of two quite different fairways it should be aiming at,” Haldane said in his speech.

“With the economic road ahead potentially forking, the case for holding rates until the road becomes clearer is strong.”

Britain’s economy appears to have slowed sharply during the three months to June, reflecting a lull after businesses rushed to prepare for Britain’s original EU exit date of March 29.

Some economists think the country risks slipping into recession especially if there is a no-deal Brexit.

But Haldane highlighted robust consumer spending and the strong labour market and said Britain’s economy was running at full capacity.

Even after a no-deal Brexit – something incoming prime minister Boris Johnson has said is prepared to do if the EU refuses to renegotiate the withdrawal deal – the case for a rate cut would not be clear-cut, Haldane said.

Carney and other BoE policymakers have said the BoE is more likely to cut rates than raise them after a no-deal Brexit.

Carney sounded less positive about the economy than Haldane when he said this month that underlying growth was running below its potential and relying heavily on household spending.

“PRISONER OF PAST”

Haldane used his speech to warn that markets and the public had grown too accustomed to ultra-low interest rates, a marked contrast in tone from 2016, when he defended “sledgehammer” stimulus after Britain voted to leave the EU.

“It is important that monetary policy is not a prisoner of its past, that the monetary cavalry are not called at the first whiff of grapeshot, that a dependency culture around monetary policy is not allowed to develop,” Haldane said.

“Super-charging the supply side of the economy is what is now needed,” he added.

On Monday Britain’s National Institute of Economic and Social Research said a no-deal Brexit would hit the economy’s supply capacity and lower economic output by 5% relative to a softer Brexit.

Haldane said there was no better time to sort out deep-seated structural issues around education, training and transport links.

Johnson has said he wants to cut income taxes for higher earners as well as raise payroll tax thresholds, which would represent a major loosening of Britain’s fiscal policy.

Reporting by David Milliken

Source: Yahoo Finance UK

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Sterling drops again as markets raise bets on no-deal Brexit

Sterling extended its decline on Monday as the outlook for the currency turned bleaker, with traders increasing their bets on a no-deal Brexit ahead of the results of the Conservative Party’s leadership election.

The pound’s weakness was in contrast to the general calm in broader currency markets, and signalled growing unease among investors over the likelihood of eurosceptic former foreign minister Boris Johnson becoming the next prime minister.

The result of the weeks-long internal party election will be announced on Tuesday, with Johnson widely expected to have beaten foreign minister Jeremy Hunt. The winner will become prime minister on Wednesday.

The pound last traded down 0.2% at $1.2476, not far from the 27-month low reached last week, having declined 1.7% against the dollar so far this month.

Against the euro, it fell to 89.98 pence.

Some investors are worried Johnson could pull Britain out of the European Union on Oct. 31 without a trade deal in place in order to appease members of his Conservative Party and frustrated pro-Brexit voters, three years after Britons voted by a narrow majority in a referendum to leave the EU.

“To save the Conservative Party, he (Johsnon) has to deliver Brexit on Oct. 31,” said Helen Thomas, CEO of macroeconomic consulting firm BlondeMoney.

Market participants have been buying more options since early May to protect against losses in sterling and have consolidated their positions in the past few days, according to three-month sterling risk-reversals, which measure demand for buy and sell options on the British currency.

Three-month implied volatility in the pound has risen since the beginning of the month and has hit its highest level since early April, signalling that traders are bracing for a rocky ride for sterling.

Still, levels are well below the highs achieved before Britain’s initial March 29 deadline to leave the EU, which was extended after Prime Minister Theresa May failed to pass a withdrawal deal in parliament.

(For a graphic on ‘Implied sterling volatility surges around Oct 31 deadline’, click here tmsnrt.rs/2O9MJHo)

Hedge funds have also increased their short positions on the pound to $5.94 billion via currency futures in the week to July 16, a 10-month high, based on Commodity Futures Trading Commission data.

“The market will look to price in the chance of a no-deal Brexit at 50/50,” said Neil Jones, head of European hedge fund sales at Mizuho.

Morgan Stanley said it now saw a 30% chance of Britain leaving the EU without a deal compared to 25% previously.

Though investors look anxious, BlondeMoney’s Thomas argued they aren’t worried enough.

“The risk (of a no-deal Brexit) is really, really underpriced now,” she said, adding that she expected to see sterling fall to parity against the euro in the event of Britain crashing out of the bloc without a deal.

Voting by Conservative Party members in the leadership election ends at 1600 GMT on Monday. The announcement of the winner is expected around mid-morning on Tuesday.

Some analysts expect the pound to hover around its current levels, at least for now, given that the UK parliament will enter summer recess shortly and therefore won’t make any new progress on Brexit negotiations.

“Sterling already trades at crisis levels and typically struggles to go much lower,” said Jordan Rochester, forex strategist at Nomura.

In a note to clients, Citi analysts said that a no-deal Brexit would likely prompt the Bank of England to cut interest rates, which “could help offset the negative economic effects of ‘crash out’ and support the currency.”

Reporting by Olga Cotaga; Editing by Gareth Jones

Source: UK Reuters

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Will the Bank of England raise or cut interest rates after UK inflation data?

UK inflation has grown at an annual rate of two per cent for the second month in a row, official statistics confirmed today.

The consumer price index (CPI) figure is bang on the Bank of England’s target. It thinks two per cent inflation is ideal for ensuring smooth growth in the economy.

But what does this mean for the Bank’s main interest rate, which currently stands at 0.75 per cent?

If inflation drops below two per cent, the BoE should theoretically cut rates to encourage borrowing and spending, and vice versa.

However, Brexit uncertainty has made the Bank reluctant to take any action for fear of destabilising the economy.

“There is little pressure for the [Bank] to adjust interest rates in either direction,” said Andrew Wishart, UK economist at Capital Economics, in response to today’s figures.

“There was still little sign of rising underlying inflationary pressures despite the continued strength of pay growth in May,” he said. Official figures yesterday showed real pay grew by 1.7 per cent in the year to May.

“A fall in energy price inflation and a reduction in Ofgem’s energy price cap in October should take 0.3 percentage points off inflation over the second half of the year,” Wishart said.

Brexit fog
Investec economist Victoria Clarke said: “For the Bank of England the close-to-target inflation readings helps the institution to maintain its wait and see position amidst continuing questions over Brexit’s likely course”.

“We maintain our view that the BoE is happy sitting tight throughout this year and through much of next year too,” she said.

The way Britain leaves the European Union will be at the forefront of the Bank’s mind. It has hinted it could slash rates to ease the economic turbulence of a no-deal exit.

“On-target inflation gives the Bank of England plenty of room to cut interest rates in the event of sharp slowdown,” said Ian Stewart, chief economist at Deloitte. “The likelihood of the UK joining the global move to easier monetary policy is rising.”

But George Buckley, Nomura’s chief UK and euro area economist, said: “The response of inflation to a hard Brexit may be for a sizeable rise” due to higher tariffs, restrictions on incoming goods from Europe, and a lower pound.

Such a rise would ordinarily trigger a rate cut, but the Bank will likely wait and see exactly what happens to the economy immediately after a no-deal exit, should it occur.

Certain elements of today’s inflation figures, such as lower producer input and output prices, are “helpful for the Bank,” said Howard Archer, chief economic adviser to the EY ITEM Club.

The data gives “decent scope” for the BoE “to adopt a flexible approach on interest rates should the economy continue its current struggles amid Brexit uncertainties,” he said.

By Harry Robertson

Source: City AM

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Sterling slides back to $1.25 as economy and Brexit worries grow

The British pound fell back towards six-month lows against the dollar and the euro on Monday, with traders still nervous about a loss of momentum in the UK economy, the prospect of an interest rate cut and a new prime minister.

At the end of last week, sterling ended a nine-week losing streak against the euro and inched up from a low of $1.2439 hit at the end of June.

However, analysts are largely bearish on the pound after a run of poor economic data and signals from the Bank of England that its next move may be to cut interest rates rather than raise them, as it had previously flagged.

The pound fell 0.5% to $1.2510, while against the euro it declined 0.5% to around 90 pence.

Sterling had hit a six-month low of 90.10 pence per euro last week.

On Tuesday, employment and wage growth data for the month of May will show how the British labour market is holding up. Many economists expect the UK economy will have contracted in the second quarter.

Investors are also waiting for the outcome of the Conservative party leadership contest to replace Prime Minister Theresa May.

Eurosceptic Boris Johnson is the favourite to win against Jeremy Hunt in a vote by Conservative party members. The winner will be crowned leader – and prime minister – by the end of July.

Nomura FX strategist Jordan Rochester said the bank’s analysts had concluded that sterling was “in the value zone for now, vols are cheap and a lot of bad news is priced in, but that’s just for the next six weeks or so”.

“In September, hard Brexit risks will once again be priced in by markets,” he wrote in a research note.

Britain is scheduled to leave the European Union on Oct. 31.

David Madden, analyst at CMC Markets, noted that on a technical basis, sterling/dollar “has been driving lower since mid-March, and if the bearish move continues it might encounter support at $1.2365 region.”

Reporting by Tommy Wilkes; Editing by Jon Boyle and Kevin Liffey

Source: UK Reuters