Sterling Struggling Despite Data

Levelling off of inflation to bring long term benefit

The bulk of the fall in Sterling happened in the immediate aftermath of the Brexit referendum and has been blamed, primarily by the Bank of England Governor for the “imported inflation” that has driven real wages lower.

Since that was now over a year ago, the effect on year on year data has disappeared. Thus, if Mark Carney is correct inflation should start to fall since there is little in the way of economic activity or wage increases to provide “traditional” inflation which occurs when an economy is overheating.

The latest prediction from the Bank of England is that inflation will peak in October at 3%. Given the past two months data, that could look a little pessimistic.

Employment and inflation are the two most “immediate” pieces of economic data since they are easily visible to the man in the street. Any improvement (or deterioration) is felt quickly since they are both backwards looking and their effect has already been felt prior to official confirmation.

The path of Sterling is now far more accurately tracked by its value against the single currency than versus the dollar. The dollar is widely affected by many drivers whereas the drivers of the Euro often also affect the pound.

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Sterling steady but the outlook is bleak

The pound has fallen close to a major support level against the Euro but has so far managed to attract sufficient buying interest for it to remain intact.

The 0.9150 level is a year’s high and was tested on two separate occasions last week. Technical traders see the need for a correction before the common currency can move significantly higher but any correction seen so far has been shallow.

There has been a lack of any concern at all shown by the market for the effect of Brexit on region itself. While trade between the U.K. and its EU partners is more significant for Britain than it is for the region, any disruption will still leave a substantial hole.

Brexit is considered a uniquely British issue and will likely remain as such.

The rise in the value of the Euro is beginning to influence exports. German trade data is starting to suffer which could lead to a levelling off of growth in the EU’s largest economy.

This week’s U.K. Q2 GDP data is unlikely to be amended from the previous release and will be treated with continued relief that at least it is positive territory and the falloff in business investment doesn’t yet look likely to bring a recession.

Pressure for rate hikes needs economic confirmation

It appears that the period of historically low interest rates globally is coming to an end. At least that is true if you read a great deal of economic commentary.

Listen to Central Bankers and you will get a very different story.

Having said that, two G7 members, the US and Canada are on a tightening bias. The rest are however quite some way away from hiking. The EU and its members, Germany and Italy, is bound by the commitment to provide stable low inflation growth to the entire 19 nation bloc, the U.K has, well documented issues, which means its hands are tied and Japan is a whole separate issue.

Despite its overwhelmingly trade driven economy and a currency that fluctuates driven by as many external influences as the dollar, there is virtually no inflation in Japan, rates remain and will most likely stay at or close to zero as they have for many years.

The global economy is growing but fears over the 2008 financial, banking and debt crisis have brought a fresh bout of conservatism to Central Banks as they strive for confirmation of sustainability of the data.

The U.S. tends to be the trend setter, having cut rates to zero and introduced quantitative easing first, it has started to reverse those policies first although the tightening has had negligible effect on the currency which is 10% down on the year.

This week’s events of note

A fallow week for the U.K. despite Q2 GDP data being released.