Sterling gave up some of its early morning gains against both the single currency and US dollar when the government announced it would trigger Article 50 on Wednesday, 29th March. It has been reported that a letter will be written to the European Council to kick off the process.
Under Article 50, talks on the terms of the exit and future trade negations are not allowed to take place until the UK has formally notified the EU of its intention to leave. It is hoped but not necessarily expected that the negotiations will be concluded by March 2019.
On the data front, the Rightmove house price index showed yesterday that asking prices for homes in England and Wales had increased by 1.3% month on month due to the shortage of properties for sale. This is the second highest monthly increase since 2007.
The first of this week’s two major data sets will be out later today when the consumer price index is released. This is the Bank of England’s preferred reading on inflation. Since September we’ve seen inflation push higher to 1.8% from 0.6%. The BoE’s target rate is 2% and the central bank is forecasting that the target will be exceeded later this year.
Higher inflation is one of the key components required for raising interest rates. If we see 2% exceeded this week, more BoE members may vote for an interest rate hike in the UK. Markets are now pricing in an around 95% chance of a 25-basis-point rate increase by September 2018, compared with just 60% on Wednesday.
Given the rhetoric coming from both the European Central Bank and the Federal Open Market Committee, businesses should expect interest rates to go up all around. This is, as always, data-dependent.