There are three main influence for sterling. The first is the general dollar direction. As widely recognized, the greenback was weak last year and this has continued into this year’s activity. After falling in January, the dollar is set to close higher against all the major currencies but the Japanese yen. Sterling’s 2.6% decline (~$1.3820) this month cuts last month’s gain in half.
The second driver for sterling has been the prospect for another rate hike after last November’s move. Sterling began the week on a firm footing, reaching $1.4070, on the back of hawkish comments by BOE Deputy Governor Ramsden who changed tone from his dissent from the November rate hike. This coupled with recent comments from Carney fanned speculation of a May rate hike.
The Bank of England meets next week, but interpolating from the OIS market suggests about a one-in-seven chance of a hike then, up from about a one-in-25 at the start of the month. A little more than a 50% chance of a hike is discounted for May. It finished last year near 31% and was a little below 40% at the end of last month.
The third driver is Brexit. From the outside, it appears the UK has a sweetheart deal. It is part of the EU but is has opt-out privileges from the area’s boldest initiatives including the common currency and the Schengen Treaty. Its strategy of seeking a broader rather than a deeper union has been quite successful. However, as the EU grew over the past several decades, the principle of unanimity in decision-making had to give way to more qualified majority voting. This led to the UK losing its veto on numerous issues (but not all).
Many in the UK argue it was the EU that changed. There seems to be some truth in that claim, but efforts to increase the range of cooperation and deepen the union has been a consistent current, though one that the UK found easier to resist in the past. Moreover, it is also true that a part of the Tories and UK voters have been consistently opposed to the EU.