UK inflation boosts the Pound, but the Irish border remains key
20 September, 2018
Yesterday was an interesting day on the currency markets, with Sterling having a rather tumultuous day as a result of various data releases over the course of the morning.
First up we saw the Pound drop as a result of news reports suggesting there was a major new disagreement between UK and EU negotiators over the Irish border situation. Theresa May was heading over to Salzburg to an unofficial meeting of EU leaders ahead of the upcoming summit, and reports suggested she was heading into a storm over the Irish border issue.
However, the half-cent drop we saw the first thing, was soon eroded when UK inflation numbers came out at 9.30am. Headline CPI inflation rose to 2.7% from a previous figure of 2.5% and an expected figure of 2.4%, and the Pound jumped back up to its overnight position. Higher inflation is Pound positive because, while the current political and economic climate is unlikely to lead to the Bank of England raising interest rates, it does mean they are unlikely to lower rates, and so Sterling investors are likely to stay on board, providing a boost to the otherwise vulnerable Pound.
Midday came, and the Irish border was back on the agenda, as was Sterling weakness, with Theresa May stating she would not accept any compromise on the border situation that leads to a weakening of the UK as an independent customs block. The fear she has is that any border between Northern Island and the rest of the UK – seen as one option to keep the Irish border itself open, essentially separates Northern Island and is a step down the road towards the break-up of the UK. So, this statement led to another significant drop in Sterling, similar to the one seen first thing in the morning.
Again, the Pound was able to pull itself back up over the course of the afternoon, although not as quickly as was possible with the inflation release. This is indicative of overall confidence in Sterling, largely as a result of recent Brexit developments, which have seen Michel Barnier indicate that a deal now seems quite likely.
There is no real expectation of any significant progress over the course of the Salzburg meeting of EU leaders, but as can be seen from yesterday, even a hint of disagreement can dramatically affect Sterling’s position. As a result, anyone with an upcoming currency purchase should be in close contact with their CI account manager, so that they know exactly what is happening and exactly what their options are.
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