The British pound has jumped back through the $1.40 mark against its US counterpart after a transition deal between the UK and the EU was reached earlier today.
Both sides have agreed to a 21 month transition period after the UK officially leaves the EU next year but the former will have to follow European Union rules during the transition period and have no say in future EU policy.
Although a deal in principle was reached, which also included the rights of British citizens living in the EU and EU citizens living in the UK, the issue of the border between Northern Ireland and Ireland remains unsolved and if an agreement can’t be reached, the chances of the transition deal unraveling remain high.
“There is a lot of optimism about the transition deal. The market thinks it’s a done deal and the general expectation is that a deal is going to be contingent on the Irish border issue,” said Alvin Tan, an FX strategist at Societe Generale (PA:SOGN).
The short-term focus for the pound this week will be the release of local data, which kicks off tomorrow with CPI figures, followed by Average earnings numbers on Wednesday and then the all-important interest rate decision from the Bank of England on Thursday.
No Changes in rates are expected with this week’s decision but the data released earlier will be closely monitored and in particular the wage growth figures on Wednesday.
Inflation is already running well over the BOE’s preferred target rate so if the wage figures come in strongly it should set the stage for a rate hike in the coming months.