Sterling slips back below $1.31 as Brexit discussion begins

Sterling slid back below $1.31 on Monday, with hints of a division as the Conservative government goes back into Brexit talks weighing on the currency after it flew to its highest levels in ten months.

Four days of Brexit discussions started in Brussels on Monday with the UK articles full of pieces of advice from academics, commentators and former senior civil servants of the confusion that the process may cause for British administration and industry.

The pound surged almost 2 cents on Friday to hit $1.3113, its highest since last September, following U.S. inflation and retail sales information came in lower than expected, placing into uncertainty the possibility of a further rate hike from the Federal Reserve this 2017.

But Sterling began the week by edging downward from those highs, trading below 0.3 percent at $1.3058 and 87.84 pence per euro respectively.

“It does look like there is a bit of independent sterling weakness and politics is the obvious source,” said Gavin Friend, an analyst with National Australia Bank in London.

“I can’t get enthusiastic about the pound at these levels. After a weekend when the Tory party has appeared to be tearing itself apart over Brexit, those people who have sterling to sell will be doing so anywhere around 1.30.”

Finance minister Philip Hammond, who has championed a manageable form of Brexit, carried the brunt of a string of critical newspaper write-ups over the weekend about what was stated at private government agreements. He said he was being hit because of his opinions on Brexit.

Brexit Secretary David Davis, in the Belgian capital for discussions with the European Union’s chief mediator Michel Barnier a month after a first conference, said on Monday that having “made a good start” during their last meeting, “this week we’ll be getting into the real substance”.

With less than two years to complete separation terms before Britain withdraws, whatever happens, on March 30, 2019, the 27 additional EU national leaders want British Prime Minister Theresa May to unite her divided nation quickly behind a clear, comprehensive plan that can reduce economic and social disturbance over Europe.

Investors will be following the discussions closely, with any hints that Britain will lose favoured access to Europe’s single market expected to weigh on the currency.

“It seems that the British government wants to (take) major steps towards the EU in the upcoming round of negotiations … It has for example admitted by now that it would meet its financial obligations towards the EU – an auspicious beginning,” wrote Commerzbank analysts in a note to clients.

“The situation remains difficult for the pound, however, as the recent reports of domestic political quarrels in the UK show … In the short term, it may not be a breakdown of the Brexit negotiations, but a breakdown of the British government which is the biggest risk for sterling.”

Some critics, though, said Sterling’s primary drivers at this time were less about governments and more about the economy and the prospect for monetary policy. Recent notices from Bank of England policymakers that interest rates could be estimated to increase have given backing to the currency.

“It seems that monetary policy is having more weight than the Brexit talks; if Tuesday’s inflation figures from the UK surprise to the upside, expect sterling to continue rallying,” wrote FXTM strategist Hussein Sayed.