The pound edged down from $1.33 on Wednesday as investors tried to gauge if the resignation of two ministers over Prime Minister Theresa May’s Brexit plans would affect an expected interest rate hike this summer.
The currency’s gains were muted, however, as traders prepared for a speech by Bank of England Governor Mark Carney hoping to understand how recent political turmoil over Brexit would impact the central bank’s plans for monetary tightening.
“The biggest initial risk to the pound from a period of heightened political uncertainty is a one-off dovish BoE re-pricing in markets,” said ING FX strategist Viraj Patel.
Carney is unlikely to comment explicitly on UK politics but traders said they would be watching for any signs of a subtle shift from upbeat comments he made last week.
Tentative signs of a recovery in Britain’s economy after a sluggish spell have lifted expectations of an August interest rate hike to more than 60 percent from less than 50 percent two weeks ago.
The resignations of Foreign Secretary Boris Johnson and Brexit minister David Davis on Monday rattled May’s grip and stirred talk of a leadership challenge less than nine months before Britain is due to depart the EU. Sterling tumbled more than a cent.
Even if May is safe, the big question for markets is whether EU leaders will go along with her Brexit plans as a new round of negotiations begins later this month.
Markets had welcomed May’s official Brexit plans – outlined on Friday – because they believe it makes a softer Brexit, in which Britain retains close trade ties with the European Union after its exit next year, more likely.
On Wednesday the currency regained its poise, and moves were mostly muted.
Sterling rose to as high as $1.3285 – roughly where it was on Friday before the resignations – before a rallying dollar knocked it back to $1.3248, down 0.2 percent on the day.
Against the euro, sterling extended gains, spurred on by weakness in the common currency. The pound stood 0.2 percent stronger at 88.35 pence per euro.
Traders are also preparing for more British economic data that, if better than forecast, may heighten expectations of a Bank of England interest rate rise.