Sterling Falls Further Amid ‘No Deal’ Brexit fears and Rising Inflation…


The pound has fallen as much as 3% since the start of August, and is now within the $1.27 – $1.28 range. Prior to this update being posted, it had dropped as low as $1.26 (the weakest since June 2017). Better than expected retail sales data and a slight rise in inflation saw no sustainable bounce, and were offset by underwhelming pay growth numbers which showed wages to have slowed to their weakest in nearly a year.

Since Bank of England Governor Mark Carney tempered expectations of a May interest rate hike back in April, sterling has dropped over 10%. The rate rise implemented by the BOE earlier this month did nothing to boost its value, chiefly because markets and economists are disbelieving of the prospect of any further rate hikes in the near future because of the uncertainty surrounding Brexit. This is in spite of the fact that the bank have proven over the past nine months that Brexit is not a hindrance to their programme of raising rates.

As for inflation rising to 2.5% (the first increase in a year), Andrew Wishart, who is an economist at Capital Economics, remarked that he believes it will prove temporary.

We still think that a fall back in oil prices and the ongoing reduction of the impact of the 2016 sterling depreciation will allow inflation gradually ease to 2% by the end of 2019.

Whilst the inflationary impact of the depreciation that followed the referendum is receding, if the renewed drop we are currently witnessing continues then it will gradually begin to push on inflation once more. There is no logical reason as to why it wouldn’t. Given that Brexit will dominate political discourse in the UK throughout the autumn and winter, sterling remains highly susceptible.

The Bank of England are still forecasting inflation to return to the target of 2% by around 2020. But that expectation is predicated on a Brexit deal between the UK and the EU that results in a successfully implemented transition period.

The opposite outcome – a no deal scenario where the UK leaves the EU without a trade agreement – would almost certainly bear witness to a precipitous fall in the value of the pound with one of the primary consequences being a heightened rate of inflation. In those circumstances, the Bank of England have already indicated that their response would most likely be to raise interest rates. According to Mark Carney himself, only a dis-inflationary Brexit outcome would point to rates being cut.

Reuters: Sterling suffers longest losing streak since 2008 as dollar surges

  • Sterling fell on Wednesday for the 12th consecutive day as the U.S. dollar strengthened, leaving the pound at its weakest since June 2017 and facing its longest losing streak since the depths of the financial crisis in 2008.
  • Sterling has weakened sharply in August as traders grow increasingly worried that Britain will crash out of the European Union next year without a trade deal.
  • On Wednesday the pound slipped further to as low as $1.2689, its weakest since June 22, 2017.

BBC: UK inflation rate rises for first time since November

  • UK inflation rose to 2.5% in July, after holding steady at 2.4% in the previous three months, as the cost of transport and computer games increased.
  • It was the first jump in the Consumer Prices Index (CPI) measure since November and was in line with forecasts.

Guardian: Pay growth slows to weakest in a year despite fall in joblessness

  • Pay growth in Britain has slowed to its weakest in almost a year despite a fall in the jobless rate to a fresh 43-year low and the biggest annual drop in workers from the EU since modern records began more than two decades ago.
  • The annual growth rate of total pay dipped from 2.5% to 2.4% while regular pay growth eased from 2.8% to 2.7%.

Reuters: UK retail sales grow faster in July, helped by World Cup and discounting

  • British shoppers spent more than expected in July, after hot weather and the World Cup continued to boost food sales and other retailers offered discounts, pointing to a solid start to the third quarter for the economy.
  • Retail sales volumes rose by 0.7 percent, and were 3.5 percent higher than a year earlier.

Guardian: High street spending dips in UK after two months of expansion

  • Spending in the shops fell in July according to Visa, in another blow for Britain’s struggling high streets.
  • The credit card company, which accounts for £1 in every £3 spent in the UK, said that despite hopes that the heatwave could lift retailers, spending was down 0.9% in July compared with the same month a year ago.

Sky News: Homebase to close 42 stores, putting 1,500 jobs at risk

  • DIY retailer Homebase is set to close 42 stores, putting around 1,500 jobs at risk.
  • Homebase said it anticipated the outlets would close from later this year into 2019.

Zero Hedge: US Household Debt Hits Record $13.3 Trillion

  • Total household debt hit a new record high, rising by $82 billion to $13.29 trillion in Q2 of 2018, 3.5% higher than a year earlier according to the NY Fed’s latest household debt report. It was the 16th consecutive quarter with an increase in household debt, and the total is now $618 billion higher than the previous peak of $12.68 trillion, from the third quarter of 2008.  Overall household debt is now 19.2% above the post-financial-crisis trough reached during the second quarter of 2013.

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