Sterling recovers from 2-year low vs Euro
Sterling Recovers – The Pound has had a welcome boost over the last few days, rising from it’s 2-year low vs. the Euro. The catalyst for the recovery was inflation numbers yesterday that were higher than forecast. The key CPI reading came in at 2.1%. As this is above the Bank of England’s target of 2%, it would normally signal that an interest rate rise in on the cards. Higher interest rates tend to strengthen a currency due to the higher return on offer. However, with Brexit uncertainty still hanging over the UK, I don’t think we’ll see rates going up in the short term.
Retail Sales also strengthen Sterling
The Pound received a further boost this morning following the latest UK Retail Sales data. Markets had been expecting a contraction of -0.2%, however the actual number showed growth of +0.2%. Retail Sales are a very good barometer of the overall economy. These figures show that the underlying economy is doing ok despite the uncertainty caused by Brexit.
UK Economy still in good health
Jobs figures this week show that unemployment is still at record lows. Even the recent -0.2% GDP reading needs to be taken in context. Due to stockpiling in the expectation of a March EU exit date, coupled with car manufacturers bringing forward their summer shutdown, a slight contraction was not a surprise. Forecasts suggest GDP will return positive in the next quarter.
All of the above shows that the Pound is simply undervalued due to Brexit uncertainty, and is likely to remain so for some time.
When will the Pound/Euro rates go back up?
If a Deal can be done with the EU, the Pound will surge higher in value. However, there is no impetus for the EU to negotiate while they think a No Deal Brexit will be blocked by parliament. Likely options to try and block this would be a vote of no confidence, a temporary government that can command a majority, or a general election. All of these options, including a No Deal, will probably send the Pound lower.
The only thing that could help Sterling is a deal being agreed with the EU before the end of October. Any extension to Brexit, or talk of an election, would simply increase uncertainty and kick the can further down the road. This would probably weaken the Pound further.
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