020 7898 0500Sterling (GBP, pound) weakened from its six-week high against the euro (EUR) and also weakened slightly against the US dollar (USD).
It lost its overnight momentum as the headline inflation figure undershot analyst projections by 0.1%. Despite failing to record the forecasted figure, inflation at 1.8% is at its highest rate since 2014, which is in large part due to the increase in fuel prices and the weak pound (GBP). This fourth consecutive monthly rise in inflation takes the rate closer to the Bank of England (BoE) target of 2.0 percent. With the central bank expecting levels to climb to 2.7 percent, the main question mark will be around the likelihood of an interest rate rise. Since the referendum last year, economic data has been, on the whole, robust with the UK economy continuing to function in an industrious manner. However, since the turn of the year the UK appears to be showing the first signs of fatigue in terms of economic activity, despite reporting positive numbers. The key issue that the central bank needs to consider is not only the direction of growth but the pace of growth against an inflation environment. With so much still to be played out in terms of Article 50 and the reception the UK will receive once negotiations commence, the BoE will need to sit on their hands for an extended period whilst the situation becomes clearer in the coming months.
Labour data is due to be released today. As well as growth and inflation, the labour data will be a key economic reading for the BoE with regards to timing of a rate hike. Because we are starting to see a slight softening of data, this is one area that will be closely examined. The claimant count – the change in the number of people claiming unemployment benefits – is expected to increase from last month. If this does indeed occur and the softer trend in economic data continues while inflation pushes higher, analysts will start discussing the potential of a stagflation like environment. Stagflation will provide a predicament for the BoE, as it attempts decides whether to prioritise tackling inflation or stimulating economic growth. A difficult time to predict where to next for sterling exchange rates.
