GBP Monthly Review June 2018

In the period leading up to the MPC meeting early in the month members had been teasing the markets over a rate hike. Governor Carney poured cold water on those rumours and rates were left unchanged as “continuing challenges” were cited.

The rate of inflation fell to 2.3% (1-yr low) as the Sterling rally, fuelled by rate hike hopes, drove it lower. The subsequent rapid fall in Sterling may see inflation turn higher again.

The pound fell before & after the MPC meeting as hopes of a rate hike were “kicked down the road” and the economy continued to falter with activity indexes and productivity falling.

The UK economy grew at just 0.1% in Q1, just about every indicator turned negative and Brexit fears hit investment. Consumer confidence also fell as house prices and sales activity dropped.

The long-awaited proposals, for the future relationship between London and Brussels post-Brexit, have been promised for early in June. The question of the Irish border will finally be addressed, likely to disappoint the North or South with serious consequences.

The rate of inflation, which has been falling for three months is may see a reverse in reaction to the precipitous fall in Sterling and the rise in global oil prices.

The likely rise in inflation is unlikely to provide any support for Sterling as the fear of stagflation, rising prices and falling economic activity return. Recent PMI indexes have been falling with a reversal unlikely in the current environment.

The only saving grace for Sterling could be a turnaround in the Brexit proposals which could bring a soft Brexit and continued membership of the single market. The downside of this could be a rebellion from brexiteers which could eventually lead to an election.