With this largely priced in by the market, investors instead reacted by buying into the Pound on May’s promise that a parliamentary vote would be required on Britain’s deal to leave the European Union. The speech itself was also significantly less tough sounding than the market had been anticipating. Sterling was already 1% higher prior to her speech and rallied further to its strongest position against both the Euro and the Dollar in 10 days.

We expect the bumpy ride in Sterling to continue in the coming weeks and months. The real test for the currency will come once Article 50 is formally triggered, where specific details of Britain’s trade deals begin to materialise. With markets currently bracing themselves for the worst-case scenario to negotiations, we think further modest gains for Sterling against its major peers are possible in the next few weeks, particularly against a much weaker Euro.

Major currencies in detail

GBP

Sterling strengthened sharply following Theresa May’s speech, largely off the back of the announcement that parliament will vote on the proposed Brexit deal. The Pound ended London trading a massive 2.4% higher against the US Dollar and 1.8% up versus the single currency.

The UK currency received further support early yesterday morning from a very impressive set of inflation figures that far exceeded expectations. Headline consumer price growth in the UK surged to 1.6% in December from 1.2%, with rising air and fuel fares pushing inflation to its highest level since July 2014. A sharp decline in the Pound last year is beginning to filter its way into domestic prices, and we expect to see inflation reach the BoE’s 2% target at some point in 2017.

Figure 1: UK Inflation Rate (2014 – 2016)