Is there the chance of a Pound Rally?
Sterling has had a torrid time of late, GBP/EUR sitting just above 1.12 at present. A small increase in GDP this morning did little to bolster the pounds situation. There are many catalysts for pound’s position and I am finding it difficult to find any reason for the pound to rally. The vote to leave the EU is now having a serious impact on the UK economy. UK Inflation has been on a rising rapidly recently hitting 2.9%. The Bank of England (BOE) were potentially going to raise interest rates if the increase continued, with several members of the Monetary Policy committee (MPC) in favour of a hike. The rate hike rumours had caused a short period of Sterling strength, however the latest inflation data saw a drop to 2.6%. The chances of a rate hike are now significantly less.
I am of the opinion a rate hike is not a solution to the rise in inflation and a fall in inflation figures brings it closer to average wage growth at 1.8%. I perceive this to be positive for the UK economy despite a fall in the pound. There is a close correlation between average wage growth and inflation. Now imported goods are more expensive due to the weak value of the pound the price increase is being passed on to the consumer. This is fine provided the consumer continues to buy the goods at the new high prices, however should they become discouraged this is when the UK economy could start to really suffer.
Political uncertainty and Brexit weigh down the pound
Political uncertainty historically weakens the currency in question and fifteen conservative MPs have recently given a vote of no confidence regarding Theresa May’s position. There needs to be a stable government in place when Brexit negotiations have only recently commenced. These will be the most important talks for the UK in the last fifty years. It also needs to be made clear the stance on Brexit. Will we see a hard or soft Brexit?
I think compromises will have to be made and the “have your cake and eat strategy” will have to be ditched. Compromises will have to be made on immigration if the UK is to have access to free trade and this kind of defeats one of the main reasons the majority of UK residents voted to leave. There could be public uproar which maybe why things are not moving forward as quickly as they should. This does not bode well for Sterling.
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