The last 24 hours have not been kind to Sterling. Firstly we had wage growth data yesterday showing that wages are rising at a rate of 2.1%. However, inflation is running at 3% so in real terms, incomes are being squeezed. These figures mean it’s less likely the Bank of England will raise interest rates and the Pound fell yesterday.
This morning we saw the latest UK Retail Sales numbers, and these came in significantly below expectations, also pulling the Pound down against other currencies.
The below chart shows the GBP/EUR movement over the last 48 hours. It’s worth remembering that last month, GBP/EUR was as low as €1.07 before shooting up to €1.14 on rumours the BoE would soon be raising rates.
I think however this was simply the BoE ‘talking the Pound up’ to try and limit any further losses. The latest data does not suggest to me that the BoE will be raising rates in November, and that’s why the Pound is giving up its recent gains and dropping back away.
Lack of BoE action could send Pound lower
The BoE are caught between a rock and a hard place. On the one hand, they do want to start raising interest rates to combat inflation, but if they do, mortgage rates will go up leaving consumers with less to spend, which will slow the economy meaning rates will have to be cut again! The Retail Sales number support this view, as without people spending economic activity will also slow. For these reasons, I think looking at economic data alone, it’s more likely than not that the Pound has further to fall.
Brexit Deadlock also risks pushing Sterling lower
Much depends on what happens in the coming days with Theresa May meeting her EU counterparts. If we get a surprise announcement that they will soon be moving on to trade talks, then this would push the Pound back up. However I think it’s more likely that trade talks will now be pushed back to next year. The EU are seemingly refusing to discuss anything until we have given them a figure on the divorce bill. Something, quite rightly in my opinion, that the UK are unwilling to do until talks move forwards as for me the two things are intertwined and inexorably linked. The first rule of any negotiation is being willing to walk away and the UK may well make clear that this is an option.
Potential for GBP to fall to new 9 year lows vs Euro
The above situation is Sterling negative, and there is the potential for Sterling to be sent back to it’s 9 year low of €1.07 show rates remain on hold and Brexit talks continue to falter. If you want to find out how to protect against the rate dropping, have a chat about exchange rates, or simply get a quick quote to compare with your bank or existing broker, click here to send a free enquiry today.