Sterling fell to a one-month low against the greenback this week, after the UK prime minister fumbled during a speech at the Conservative Party conference. Be prepared for more volatility, says UBS Chief Investment Office (CIO).
The pound fell to as low as 1.309 against the U.S. dollar on Friday, its lowest level since the start of September. Investors sold sterling after PM Theresa May was hit by a coughing fit, presented with a termination letter by a prankster, and some letters fell from the party conference backdrop on Thursday.
Sterling has given up much of its September gains in the past two sessions, having risen last months on hopes that the Bank of England may hike rates in November. A rate hike is still possible, says CIO economist Dean Turner, as the minutes of the September Monetary Policy Committee (MPC) meeting was unusually forthright, as have been subsequent speeches from MPC members.
"The bar is now very low for a November hike, so m uch so, it is hard to imagine how bad the data would have to be to prevent such a move," he said. "Beyond this, assuming the economy doesn't slow from here, we expect the Bank of England to hike again early next year, most likely at its May meeting."
However, a rate hike does not mean all good news for sterling. For example, Brexit negotiations continue to take place in the background, which could lead to further volatility ahead. The Autumn budget, due on Nov 22, also has the potential to change things. Public finances are slightly better-than-expected, and the chancellor may look to ease the fiscal purse strings.
CIO sees sterling trading largely flat against the U.S. dollar in the coming months, likely changing hands at around the 1.36 level.
"The prospect of a moderately looser fiscal stance, and the well-telegraphed prospect of an interest rate hike from the Bank of England, are likely to keep gilt yields stable," said Turner. "All else equal, this is likely to support sterling around current levels."