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GBP: Sterling leaks its gains

By Michael Cooper November 16th, 2016

Yesterday morning the all-important UK inflation number was released. At 0.9%, inflation was lower than the previous reading and below forecast. It was expected that recent sterling weakness could have pushed inflation higher, but as yet this hasn’t happened.

The Times reported a leaked memo yesterday which suggested that the government has no overall plan for Brexit. The Times warns that Whitehall is working on 500 Brexit-related projects and could need 30,000 extra staff. More importantly that there are ‘divisions within the cabinet’ over the direction of Brexit negotiations. It goes on to suggest that it will take another six months before the government decides precisely what it wants to achieve from Brexit, which will therefore in turn miss Prime Minister Theresa May’s target of the end of March for triggering Article 50. The government says that it ‘does not recognise’ the memo.

The combination of lower inflation and additional political uncertainty resulted in a weaker sterling yesterday morning.

Yesterday also saw the inflation hearing involving Bank of England (BoE) Governor Mark Carney and various members before the Treasury Select Committee. Carney reiterated that he will definitely quit his role as BoE Governor in 2019 after promising to stay on for an additional year last month. “I added the year out of a sense of responsibility,” Carney told lawmakers in London. He went on to say that the BoE expects inflation to hold above 2% by mid-2017.

Another key indicator for UK growth is due today, as is a key employment reading. The market will be focusing on two main aspects with the latter: the pace of the increasing unemployment claims and the pace of growth in average earnings. The main concern moving forward will be if the pace of inflation outstrips the pace of salary growth.