This Pound Sterling forecast looks at the impact of the recent UK inflation figures and upcoming Retail Sales data and how they affect GBP exchange rates this week. The below table shows the market movements for a number of GBP currency pairings yesterday:
|Currency Pair||% Change||Difference on £200,000|
Inflation is causing a lot of worry amongst investors due to it’s recent rapid rise. The rise in inflation is a direct result of the vote to leave the EU. The uncertainty surrounding Brexit negotiations has caused the Pound to drop as low as 1.1170 on GBP/EUR of late.
The weak value of the Pound has caused imports to become considerably more expensive. Importers are then forced to put the value of their goods up and these price increases eventually filter through to the consumer. This is fine provided consumers are prepared to pay these over inflated prices. If they are not however, this is when the economy could start to slow and there is danger of a recession.
There is a link between average wage growth and inflation. If average wage growth is not rising at the same rate as inflation, trouble could be on the way. Average wage growth currently sits at 1.8%.
Yesterday we saw the release of Consumer Price Index (CPI) data. CPI is a measure of price movements by the comparison between the retail prices of a representative shopping basket of goods and services. It is a key barometer for inflation. Inflation dropped from 2.9% to 2.6% and Sterling fell against the majority of major currencies as a result.
Despite the fall in Sterling, I am of the opinion a drop in inflation is a good thing the closer to average wage growth the better for the economy long term. The reason for the drop in value can be attributed to the likelihood of an interest rate by the Bank of England (BoE), which is now unlikely short term. Further increases in inflation would have meant a rate hike would be more probable. I do not think a raise in rates is a solution to the inflation problem.
I feel in order to for Sterling to rally significantly the stance on Brexit needs to be made clear and we need a firm government in place without constant threats to the prime minister’s position.
I think there is still the possibility of a soft Brexit with the freedom of movement of people needed in order to have free trade. I think there will be need to be compromise rather than the previous “have your cake and eat it strategy”. Unfortunately if we are moving toward a soft Brexit I think it will not be quick for fear of public uproar following the vote to leave.
Mark Carney the governor of the BoE spoke yesterday but following the drop in inflation the chances of a rate hike have dwindled and the markets had already reacted meaning Carney’s words did not have the same impact as usual. There was however the unveiling of the new polymer £10 note featuring Jane Austen, which was lovely.
Considering the concern surrounding inflation at present UK retail sales has the potential to cause volatility. The data is released tomorrow and expectations are for a rise, however if they are below the 0.4% estimate we could see Sterling lose value.
If you have a currency requirement it is vital to be in touch with an experienced broker to maximise your return during such an unpredictable period. I would strongly advise getting in touch with us here at FCD so we can work on a strategy to suit your individual needs.
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