GBP Monthly Review April 2018

Despite Theresa May wanting a longer transition period, the UK accepted the terms offered by Brussels and the transition period will last just 21 months. Sterling rallied to a high of 1.4346 against the Dollar, but has since begun to correct.

TThe latest meeting of the MPC saw two members vote for an immediate hike and another call for the committee to be more forward thinking concerning the normalisation of interest rates calling for two hikes a year. The market still sees a 62% chance of a May hike down from 70% in February.

Wages including bonuses rallied strongly in February finally outstripping inflation as cheaper food and petrol brought CPI down. The effect of the Brexit collapse in Sterling has finally “washed through” and the effect of a rallying pound has also brought inflation down.

Jeremy Corbyn, the leader of the opposition, may have dealt his party’s chances of winning the next election a fatal blow as he failed to condemn Russia for it’s alleged use of a nerve agent against a former agent on UK soil. Corbyn was content to say that “the jury is still out” on who was responsible.

It has been rumoured that Theresa May, the Prime Minister agreed a deal over the Irish border issue as part of the transition negotiations. If that is negative, as it most likely will be, for the North, there could be major fallout.

As inflation rose virtually unchecked and the MPC were willing to place the blame firmly on Sterling weakness, they are going to have to adjust as it starts to fall. Any talk of rate hikes should be wholly dependent on consumer price inflation in the short term as it will take a while for wage inflation to feed through.

The pound was the market’s “flavour of the month” in March but is unlikely to get such a smooth ride as the issues start to conflict with each other. A rise in the possibility of a rate hike to a probability will be positive. However, if inflation continues to fall, the MPC will be hard pressed to spin a hike. Brexit talks tend to be supportive in their early stages, so it is doubtful that Sterling will move far form a 1.3820/1.4250 range.

Following the capitulation seen in stage one of Brexit and similar actions for the UK Government to ensure a transition was agreed, it seems likely that the trade deal will follow similar lines. As the talks dissolve into “committee stages” it is usual that optimism grows so Sterling may receive a boost from “radio silence.”