The pound rose to a seven-day high on Thursday as traders strengthened bets on an interest rate hike this summer but concerns about a crucial Brexit meeting on Friday kept the currency’s gains in check.
After a feeble start to 2018, the British economy is showing early signs of a recovery with surveys for the manufacturing, construction and services sectors beating expectations and heightening the prospect of a rate hike by the Bank of England in August.
That has brought some respite for sterling after weeks of losses caused by a strong dollar and worries about whether Britain can secure a deal with the European Union before it leaves the bloc next March.
At 0830 GMT the pound was up 0.1 percent at $1.3236, away from a 2018 low last week of $1.3050.
But sterling was down 0.2 percent against the euro at 88.34 pence after the single currency rose on strong German industrial data and a report by Bloomberg that European Central Bank members view an interest hike at the end-2019 rate hike as too late.
The government is preparing for a crunch Brexit meeting on Friday and Prime Minister Theresa May has called for unity but her government factions appear to remain intransigent.
With less than nine months until Britain exits the bloc and no trade agreement secured, there is concern that the meeting could threaten the stability of May’s government, which poses downside risks for the pound, analysts at MUFG said in a note.
“The pound has failed to benefit so far from the improving cyclical momentum in the UK. Heightened Brexit uncertainty appears to be holding back upside potential for the pound in the near-term,” said the note.
Meanwhile Britain’s biggest carmaker Jaguar Land Rover said a so-called “hard Brexit” would cost it 1.2 billion pounds ($1.59 billion) a year.
JLR joins a growing list of companies which have raised concerns about potential disruption to business if Britain crashes out of the bloc next March without a trading agreement.
The pound has traded within tight ranges and volatility has fallen, possibly because markets have already price in the worst-case scenario — a “hard Brexit.”
But it may also indicate investors have stopped second-guessing outcomes, preferring to sit on the sidelines until the prospect of a clean or disorderly Brexit becomes clear.