For the pound, events in Westminster and Brussels are the noise, while the signal is coming from Threadneedle Street and Frankfurt.
That’s the message from ING’s latest analysis of sterling’s potential after the UK currency’s difficult summer.
“We believe markets have adequately factored in the prospects of ‘bad’ political headlines for the pound in the near term,” says Viraj Patel, currency strategist at the Dutch bank. “The smooth passage of the EU repeal bill may not actively drive sterling higher, though it will certainly offer some good news amid a backdrop of Brexit-related negative sentiment.”
Any upside for sterling is more likely to track a more tentative tone from the European Central Bank at its monetary policy meeting on Thursday.
“Some caution by the ECB over an over-exuberant euro — coupled with greater Bank of England concerns over sterling-induced inflation next week — could provide a de facto cap on upside for the pound against the euro around the £0.92 to £0.93 area.”
The BoE’s next meeting is on September 14, and ING expects an element of sterling consolidation going into it, as “both a softer UK economic outlook and domestic political risks are adequately priced”.
Mr Patel also thinks the Monetary Policy Committee’s concern at the implications of the weak pound for inflation could extend to “second-round effects,” as sterling’s sustained fall reaches deeper into input costs, adding to the uplift for domestic prices.