The pound tiptoed higher on Monday, as investors focused on the Article 16 impasse and the likelihood of the Bank of England (BoE) raising interest rates in December.
Brussels and London have been at loggerheads in recent weeks after Britain, discontented with the Brexit withdrawal agreement it signed last year, threatened to trigger Article 16 – an emergency clause of the Northern Ireland Protocol – potentially leading to a trade war.
Brexit-fuelled tensions are creating headwinds for the pound, but until something significant occurs, such as the triggering of Article 16, resistance will be minimal.
BoE governor Andrew Bailey stated that he’s “very uneasy” about surging inflation throughout the economy, adding “It is not of course where we want it to be, to have inflation above target.”
Speaking to MPs on Monday, Mr Bailey said the decision to hold interest rates at a historic low of 0.1% last month was a “very close call”, despite inflation being above its 2% target and on course to exceed 5% in 2022.
The BoE, which is weighing up whether to raise interest rates in December, is monitoring the job market after the government’s furlough scheme ended last month, with around 1.1 million people believed to still be protected by it before it expired.
Official figures released this morning showed 160,000 workers were added to British payrolls in October – the first month after the end of the furlough scheme.
Separate data published by the Office for National Statistics on Tuesday morning showed the UK unemployment rate dropped to 4.3% in the three months to September. Economists had expected the rate to fall to 4.4% from 4.5% in the three months to August.
GBP USD began to advance following the release of the encouraging employment data, which will raise bets of a rate hike next month.
Dollar remains firm
The dollar eased in value on Monday but remained on firm footing following last week’s inflation concerns.
The US currency received a leg up on Wednesday when figures published by the Bureau of Labor Statistics showed US consumer prices rose in November at the fastest annual pace since 1990 – fuelling speculation that US interest rates will be raised sooner than previously expected.
Following data on Friday that showed consumer sentiment dropped to its lowest in a decade, investors will be focusing on US retail sales for October today, to see whether the decline in consumer morale is being reflected on the high street.
It’s a busy day in the UK’s economic calendar tomorrow, with a clutch of notable data sets slated for release: Consumer Price Index, Retail Price Index, and the Producer Price Index.
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