GBP volatility, scarred by Brexit negotiations. Here’s what to expect this week

The British pound managed to close last week modestly higher, rising 0.61% on the week against the dollar. The modest gains come after the week before; the GBP slumped 1.78%.

Economic data last week saw the monthly inflation figures for September and the unemployment report.

The UK braces for sharp increase in consumer prices

Official records showed that inflation in the UK advanced one percent in September, beating estimates of 0.9% and up from 0.6% in August. The core CPI which excludes volatile food and energy components jumped 1.5% during the month, up from 1.3% previously. The increase in consumer prices in September marked the sharpest monthly increase in over two years.


UK Inflation (CPI) m/m: 1% (Source: FT.com)

The decline in the exchange rate which has fallen by over 20% since the June Brexit referendum was the main factor contributing to the price increase, and according to many experts, there is more room to the upside.

Indeed, over the week, as many Bank of England officials spoke, the common theme was that the central bank now expects inflation to reach 3% by as late as the first quarter in 2017. Bank of England Governor, Mark Carney said that the central bank would tolerate “a bit” of inflation overshooting the 2% target.

Workers in Britain feeling the wage squeeze

While consumer prices increase, the labour market landscape showed wages rising at a slower pace. Still, the unemployment rate was seen steady at an 11-year low of 4.9% for the third consecutive month.

Real wages, however, grew at the weakest pace in over a year, according to official records, putting a squeeze on wage growth. After an initial resilience to the aftermath of the Brexit referendum, the cracks in the UK’s labour markets are only set to intensify further, according to many economists. Muted earnings growth, alongside higher consumer prices, is expected to weigh on the purchasing power of the UK consumers.

Incidentally, there were also some early signs of this as the September retail sales report released last week turned out to be flat, registering no growth and now marks two months of a flat print on retail spending.

EU plays tough on the UK on Article 50

Meanwhile, politics seem to be overshadowing the economics as EU leaders, more importantly, German Chancellor, Angela Merkel and the French president, Francois Hollande have taken a tough stand on the UK. The EU leaders ruled out any back door negotiations with the UK and had been consistently seen driving home the fact that the UK must brace itself for a “hard Brexit.”

On the domestic front, British PM, Theresa May has been facing pressure as well, wielding the various Brexit related lawsuits. Although there is the talk of the Brexit referendum being put to a parliamentary vote for approval, Ms May made it very clear (telling EU leaders as well) that Britain will not be coming back to join the EU economic bloc.

The week ahead is quiet as far as economic data from the UK is concerned, except the advance GDP report for the third quarter. BoE Gov. Carney is also expected to speak, making these two events as the fundamental risks for the GBP in the short term.

The Bank of England will be meeting in early November, and in this regards, the comments from the central bank governor will be closely scrutinised. With inflation now expected to surge, the Bank of England is seen holding rates steady at 0.25% over the course of time with some experts suggesting that the central bank will have to hike interest rates sooner than later. While this could be positive for the GBP, until the Brexit negotiations are cleared out (which is expected to be started by March 2017), the British pound could remain stuck trading near historic lows.