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As the monetary policies of the US, the UK and the Eurozone diverge, what should investors make of this fork in the road?

Speculation has been mounting that the US Federal Reserve will raise interest rates again this year. The probability of a November rate raise looks slim, but some analysts believe there is a strong chance that the next phase of monetary tightening will begin in December, after the presidential election and one year after the Fed’s first rate rise since 2006.

With a jobs market approaching “full employment”, interest rate increases should stem the effects of the inflation which should, theoretically, follow. However, economic data has been mixed recently. Expenditure figures point to a strong rebound in GDP for the third quarter, while production-based business survey evidence is much less promising. “More recently, softer data and political risk mean that many don’t think the Fed will move until December,” says Perry Asforis of Infinity International.

Just like their American counterpart, the Bank of England (BoE) and European Central Bank (ECB) are also on standby, but any movements in their interest rates are likely to be cuts.

“Global policy divergence seems most profound between the Fed and the ECB, with central bankers facing in opposite directions,” says Perry. The ECB may have held interest rates this week, but it is expected to cut them further into negative territory if Eurozone inflation and growth are still lagging in December.

Having cut interest rates to 0.25 per cent in August 2016, the Bank of England has broken with the pre-Brexit expectation that it would follow the Fed in tightening. “The UK has had a fair amount of stimulus from the Bank to help support confidence, and the macroeconomic data hasn’t been too bad,” says Perry. “It will probably want to wait until Article 50 is triggered before it decides what support is needed.”

As rates diverge, and the dollar strengthens whilst weakening Sterling and the European Single currency.

It’s not been a great month for sterling, with the currency taking a further pounding and sinking to fresh 31-year-lows in mysterious circumstances, “amid forecasts for more uncertainty to come”  Perry says. “It is still early days to determine the end-result (of Brexit) but one thing seems certain: Sterling will remain under severe pressure”.

The one day “flash Crash” was caused by a variety of possible reasons – from a so-called “fat finger” or algorithmic (known as algos) trading error, to a low liquidity sell-off or even comments from French President Francois Hollande. But we could not pinpoint the exact reason for the plunge.

Nonetheless, “we believed that more volatility is in store for the currency, given the U.K.’s uncertain future political and economic ties with the European Union since its decision in June to quit the bloc”. Especially after U.K. Prime Minister Theresa May gave a clearer indication of when the country would begin the formal exit process from the European Union, saying “Article 50” would be triggered before the end of March 2017.

Sterling/Dollar and Sterling /Euro parity, is it on the horizon?