Unemployment critical for the Pound

20 July, 2016

Tom Arnold

Now that the furore over Brexit has temporarily taken something of a backseat, the markets are back to watching the normal range of economic stats and data releases that come out each day to see the direction the major currencies are likely to take. 

Yesterday was all about UK CPI inflation with the number coming in higher than expected – 0.5% rather than 0.3%. Rising inflation is no great surprise to the markets given that the Brexit vote has seen such a devaluation in the Pound, but what was important here was that the data collected for this figure was gathered mid-June and as such was not impacted by Brexit but rather by an increase in the oil price and the associated knock-on effects that has on many household costs. When next month’s figure comes out from data gather post the Brexit vote it would be no great surprise to see an even further increase in inflation and so while this was a surprise to the markets it had little effect on Sterling’s position because longer term this is what is anticipated.

It will be interesting to see the balancing act that the Bank of England now has to manage though – the Bank has a government set target for inflation of 2%, so moving towards this would seem to be a good thing. But, rising inflation does not go hand in hand with interest rate cuts as they would tend to exacerbate things and as such an already rising inflation rate could put Bank of England plans to cut interest rates on hold. But the easing they bring would massively help consumers coping with a slowing economy in our new “Brexit means Brexit” reality. Which way will the BoE go?

Today is all about UK unemployment numbers for the Pound with expectations that things will largely remain the same, albeit with a slightly increased claimant count. The markets are not completely confident in this though and as a result the Pound has already sucked up some losses in the last 24 hours. It would be no great surprise given where we find ourselves economically for the unemployment rate to have increased, and this could bring further woes for the Pound.
As if to highlight our economic woes further we saw yesterday the IMF revise down the UK’s growth forecast for 2016 from 1.9% to 1.7% and 2017’s from 2.2% to 1.3%, with the Brexit vote described as a “spanner in the works” for global growth. The scary thing is that they have also produced another set of predictions which are a worst case scenario where the UK struggles to reach trading agreements post Brexit…

It would seem that uncertainty is still the main calling card for the Pound and with the markets starting to find that UK data will not support the Pound, we could see things deteriorate further. Make sure you stay in close contact with your CI account manager so that you can try and get the best from the market for your upcoming currency purchase.