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The Pound staged a modest recovery during yesterday’s trading session, rising from €1.13 to €1.1390. The catalyst for the move higher was the release of the latest UK inflation figure, rising to almost 3% in the biggest jump in 4 years.
Usually higher inflation would result in the Bank of England (BoE) raising interest rates to keep it in check, which would in turn strengthen a currency due to the higher return on offer. However, the BoE have already stated that they would tolerate rising inflation and a weaker currency without raising interest rates. While the next move the BoE will make will probably be a hike in rates, this is not expected for at least 2 years.
With rates unlikely to move higher until 2019, why did the Pound rise?
Most reports point to profit taking on the move lower since last week’s election (investors that had sold the Pound now buying it back while it’s cheaper) strengthening Sterling due to the increased demand. So while the inflation numbers probably helped the move higher it was not the underlying reason. Another reason is that while the BoE aren’t raising rates any time soon, they may decide to refrain from further injections of cash (Quantitative Easing) as that would weaken the Pound further and lead to even higher inflation. All of the above helped steady the Pound a little.
I don’t think we are witnessing the start of a sustained recovery. Higher inflation squeezes consumers and means less disposable cash due to wage growth lagging well behind rising prices. Adding this to the existing worries of political uncertainty and Brexit talks paints a pretty gloomy picture and would suggest to me that this is a momentary respite, rather than the start of a recovery for Sterling. The implications of last week’s election are now becoming more apparent and in the longer term, may prove Sterling positive. I think that the conservatives will now have to seriously scale back their austerity plans and ditch planned cuts on Public Spending, which would certainly help growth. It’s also likely May will pursue a softer approach to Brexit talks. These were supposed to start on Monday, but I think that it’s likely that until the UK gets its house in order there will be a delay to talks commencing. Theresa May’s own goal means taking a few steps back, and in the short term, this means further political and economic uncertainty, both of which are likely to weigh heavily on the Pound in the next few weeks. With serious levels of uncertainty hovering over the UK, those with a currency requirement to either buy or sell the Pound should take action now, and speak to us today about the options you can consider to ensure you make the most of your currency.
The UK releases its latest Employment, earnings and jobless claim numbers at 09:30am. Earnings are forecast for 2% growth (1% below inflation) and if the actual figure is lower than this, expect a fall for Sterling exchange rates. Elsewhere, the EU releases its latest Industrial Production figures. Over in the USA, we await the FED interest rate decision at 7pm and they are widely expected to finally raise rates by 0.25%. It should strengthen the Dollar if they do, but as it’s almost a given, it’s probably priced into the market for the most part.
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