UK – The Emerging Inflation And Pound Scenario

  • Jan 17, 2019 GMT
  • Team Kalkine
UK – The Emerging Inflation And Pound Scenario

UK inflation rate dropped to 2.1%, lowest level in last two years

Office for National Statistics (ONS) reported inflation rate of 2.1% in December, and this represents a fall from 2.3% reported in the previous month.

The figure is near the target 2% inflation rate decided by Mark Carney, Governor of Bank of England (BOE). It indicates that members of monetary policy committee are less likely to consider any near-term hike in the interest rate. The reported inflation rate was in line with the market experts’ expectations.

Mike Hardie, Head of inflation at ONS, said “softening inflation are mainly on account of plunging Crude and WTI oil prices, which has corrected near to 30 percent so far in last one month from their peaks. Then air fares also supported to lowering the inflation rate, as seasonal fares were rising slowly than what was noted last year. However, this was squared off by rise in hotel and restaurants prices, particularly in holiday packages.

On the other hand, little change in the UK Home market was noted in November, with negligible volume growth in South East London. Apparels and Footwear prices were down by 0.4% on Y-o-Y basis, but 2.3% rise was noted in food and non-alcoholic prices that hit the households.

EY Chief Economic Adviser, Howard Archer said, “rates are discouraging but not shocking for the families”.

Turbulent Pound post May’s Brexit defeat

The pound remained up on Wednesday after a plunge overnight when MPs of UK House voted down Theresa May’s deal. GBP/USD was trading at 1.286 by 02.21pm GMT, after falling as low as 1.2667 late Tuesday.

Pound was little changed against the euro, with EUR/GBP at 0. 8857. However, EUR/GBP has been trading below its 200 moving day average today, a technical parameter that suggests that a further decline may be seen.

Meanwhile, the house has voted 432-202 against May’s EU withdrawal deal, and this is a disastrous defeat for a government in British history. Margin of Theresa May’s defeat came as a surprise, but the defeat itself was discounted by the market for a long time.

The market is now discounting the delay in Brexit which is scheduled on 29th March, and possibilities for extension of Brexit date are more likely. In longer run it may create two possible scenarios – leave EU with no deal or stick with EU.

Japanese Yen to Sterling exchange rate avoids losses amid the humungous defeat of May’s deal. This is on account of weak demand for safe haven Japanese Yen. GBP/JPY was trading at 140.09 (as at Jan 17, 2019) at the time of writing.

While the market was keeping an eye on the latest vote for confidence in Theresa May’s government, wherein she defeated 306 votes against her in relation to Jeremy Corbyn's no-confidence motion, sterling got some stability. Nonetheless, the sequence of events is watched carefully while there might be more volatility in the sterling going forward.

With Bank of England reducing the interest rates to a historic low level, the spotlight is back on diverse investment opportunities. 

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