Sterling touched a two-week high against the dollar but slid back against the euro this morning, with the day’s focus likely to be European Central Bank chief Mario Draghi’s testimony in the European Parliament.
With 10 days until a policy meeting long expected to signal the pace of quantitative easing next year, Draghi’s comments have the potential to shift the euro higher after two better days driven in part by suggestions the bank could hold off on any signal of easier policy.
The pound’s long-term correlation with the dollar has kicked back in as the U.S. currency rallied in the past month and some major investors began to argue the market had come far enough to account for the initial risks related to Britain’s planned departure from the European Union.
That has made sterling among the best performing major currencies and given food to thought to the bears calling for a fall to $1.15 or lower in the first half of next year.
The BoE has been warning that business investment would be the most vulnerable to heightened uncertainty related to the Brexit vote, but so far, the negative impact is not yet evident.
If the UK economy continues to defy expectations for a material slowdown in growth in the year ahead, it will create scope for pound weakness to reverse further.