Inflation Surge Hinders Sterling

17 May, 2017

Simon Eastman

The pound took a big knock yesterday after the inflation figures for April were released showing a bigger than expected increase.

With the Bank of England targeting inflation at the 2 percent mark, we have seen this level come and go since the Brexit vote as the weakness of Sterling affects the cost of imports and subsequently the cost to retail. We saw the headline Consumer Price Index rise to 2.3 percent in March with April expected to come in at 2.6 percent. The actual result topped this at 2.7 percent, leaving expectations we could see it get much worse as the negotiations to leave the EU run their course. This alongside a slump in wage growth will mean households will feel the continued pinch as the talks roll on.

The real extent of this will be seen today as we have unemployment and average earnings figures, but the result yesterday was a negative one for the pound as we saw it slump 1.2 cents at its lowest point against the single currency, ending up a cent down. The euro clearly holds investor sentiment at the moment as we saw it rally up to fresh highs against the dollar as it tested 1.11, helped by as expected EU GDP (0.5 percent QoQ and 1.7 percent YoY) plus a better than expected trade balance, as the net import/export figures show a healthy surplus, helped again by a weaker pound.

The dollar has felt pressure from both the euro and the pound recently so although sterling slumped across the board, it saw a loss followed by recovery against the greenback. Poor housing starts figures helped, coming in much lower than predicted.

Onto today and as mentioned we await the jobs figures for the U.K. The headline unemployment rate is expected to remain the same as last month at 4.7 while those claiming jobseekers benefit is forecast to fall quite significantly from 25.5 to 7.5. Following the UK, it’s the Eurozones turn for inflation figures released at 10 am and Crude Oil stocks data from the US later this afternoon.

If the UK jobs figures fail to deliver, coupled with the poor inflation reading yesterday expect the pound slide to gain momentum. If we then see EU inflation fair well, we could easily see another cent wiped out, if not more. With that in mind, it’s prudent to mention the use of forward contracts are designed for this very reason, to take out the risk from volatile markets, when you don’t want delivery of the funds just yet. So if you have an exchange requirement on the horizon, make sure to call one of the team at your earliest opportunity to discuss the options.