A higher weekly shopping bill translates into a stronger Pound

Much has been made of the now resolved conflict between Unilever and Tesco over the increase in prices for popular off the shelf items in the UK. ‘Marmite-gate’ as it has been called, has since been solved but it is an example of some larger changes to come in the UK economy. The Brexit is pervasive and is starting to have a real and discerning impact on people’s daily lives. Even the latest Football Manager game has players facing conundrums about the complications surrounding transfers following the outcome of the vote.

Prices are rising. This is an unavoidable result when your economy is drastically skewed towards importing most of its goods from abroad and your currency suddenly weakens heavily in a short period of time. Whilst the supermarket wars are making them all drive down their margins to remain competitive, they cannot operate at a loss and have to raise prices.

It frustrated me earlier this week on my weekly shopping trip, but yesterday morning this news was suddenly a boon to anyone holding Sterling. Inflation is a measure of price change, and central banks, such as the Bank of England, tend to aim for a 2% rate of inflation each year. It is enough to keep people spending rather than saving and keep the economy ticking over, and shows economic growth and health if price rises are sustainable.

The UK and the world as a whole have been struggling with inflation for some time. Before the Leave Vote UK inflation for the year was moored around 0.6%, yet this has now almost double to 1% and is set to improve further.

How does this news translate into a stronger Pound?

Firstly citizens in the UK will be spending more for one which tends to translate into greater confidence in UK growth. Secondly it makes it less likely there will be a further interest rate cut in the UK economy, which was previously hinted at by Mark Carney (the Governor of the Bank of England) in September. If prices are rising naturally there is no need to take such drastic action to make credit cheaper and stimulate the economy during this period of economic shock.

The Office for National Statistics showed that the annual expected rise for house prices rose to 8.4% during August, so has actually sped up post Leave vote. These examples are enough to buoy the Pound and help pierce through the ‘doom and gloom’ narrative since the deadline for Article 50 was announced a few weeks ago, and provide an image of stability for Sterling following the flash crash 11 days ago.

What can we expect for the rest of this week?

There are further data sets for the Pound which could contribute to this image of stability. Unemployment and wage data tomorrow morning are expected to still reflect no losses since the Brexit vote, though retail sales figures on Thursday are expected to show the seasonal slowdown in growth that the end of summer brings for a short period. As such anyone looking to purchase Sterling in the short-medium term may wish to seriously consider taking advantage of the sudden opportunities brought forth by the flash crash, with the value of the Pound steadily creeping up against its counterparts since the beginning of the week. Call our trading floor if you would like to make the most of these spikes on 01494 725 353.


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