For the past year and a half, the United Kingdom economy and monetary policy has been defined almost singularly by Brexit. One of the most immediate impacts of Brexit was felt in the Pound. The precipitous fall of the currency which commenced immediately following the vote to leave the European Union has defined everything from politics to pricing, and trade.
More recently though, dollar weakness has been the dominant global theme, and Pound Sterling has benefitted from that trend as much as any other major currency.
The stark reality is, even though there is a modest recovery in the currency, the UK economy is shaky with signs of weakness bleeding through most major indicators. With a lack of any coherence as to the plan for Brexit at this stage, and no meaningful basis for a growth narrative, almost any recovery in Pound Sterling can be ascribed to core weakness in the greenback.
One potentially positive indicator has been inflation, but even that has a counter narrative. While the recent headline readings for inflation in the UK would put it near the head of the pack in the G-10, it is primarily attributable to the precipitous fall of the currency which fell on the back of the geopolitical concerns swirling around Brexit.
The CPI reading for August will be announced at 4:30 GMT on Tuesday. Rates will be in focus later in the week as there is a meeting of the Bank of England announcing any changes to rate and monetary policy.
Data and Events This Week
With respect to inflation, we envision a base scenario that calls for a reading of 2.75%. The reading has been at 2.6% for two consecutive months, and broadly developed market expectations call for a print of 2.8%.
In addition, Thursday’s outcome of the Bank of England’s monetary policy committee seems likely to produce a bank rate left at 0.25%, government bond buying at £435 billion and corporate bond buying at £10 billion. For another meeting, it is reasonable to expect only two members of the Monetary Policy Committee are likely to have voted for a rate rise, which mirrors the last tally. Any increase in the members voting for an increase would be perceived very bullishly by the market.
Outlook for the Pound
The Pound appears to be entering a period of stability this week as it consolidates gains made over the past two weeks. Look for choppy sideways activity for much of the early part of the week.
The Pound has been defined by three distinct moves over the past month. We had a drop versus the Dollar towards the end of August. This reached a trough and then a pivot in late August. This spurred an up move which reached an apex above 1.32 late last week.
We see the Pound in a holding pattern between 1.31 and 1.3250 this week, pending a surprise in the data. Significant surprises would be an inflation print below 2.5% or above 2.9% or any deviation in policy from the BoE.