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Sterling appreciation slowed by inflation data

19 April 2018FX
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Year-to-date Sterling has been remarkably resilient, with GBP/USD edging back to the pre-EU Referendum levels, and GBP/EUR reaching the highest levels since June 2017. GBP/USD traded to a high a high of 1.43761 and GBP/EUR touched 1.15992

The interest rate futures market has priced in the likelihood of an interest rate hike at of 82%3 probability (Bloomberg: WIRP ), at the start of the week it was roughly 90%. This had fallen following the release of the latest inflation reading from the Office of National Statistics (ONS); showing that inflation (CPI) in the UK had missed expectations at 2.5% vs 2.7% expected,4 this followed strong UK wage growth data on Tuesday. If inflation is cooling; this reduces the need for the imminent interest rate hike by the Bank of England at their May meeting. Citi Analysts expect this to come at the August meeting.

Brexit and GBP

A number of clients have been taking the recent Sterling appreciation, as an opportunity to diversify their currency holdings. The devaluation of GBP following the EU Referendum "Leave" result pushed GBP/USD to the lowest level in decades. The political and economic uncertainty weighed on the currency, however as the economy has remained resilient, and the Brexit negotiations have progressed Sterling has appreciated5. In the April FX forecasts released by the Citi Analysts, they note that the GBP Trade weighted index (Reuters: GBPTWI=BOEL) has priced out of some its "Hard Brexit risk premium". They hold a bias to see mild GBP upside, however the political backdrop of the Brexit negotiations souring provide would provide the biggest downside risk.

The chart below shows GBP/USD and GBP/EUR from the start of 2017. The Citi Analysts expect GBP/EUR to remain around these levels and for GBP/USD to edge slightly higher (6-12 months 1.456).

Political Risks Take Center Stage

Source: Bloomberg GBP/USD and GBP/EUR 1/1/17 – 18/4/18

The bullish GBP sentiment has provided a strong run over the last 14 months; the next meetings for the Bank of England along with the Brexit process are expected to be key contributors for this path to hold.

If you would like to discuss the above in further detail, please contact your Relationship Manager or the FX Counsellor team.

1Reuters spot GBP/USD 17th April 2018
2Reuters spot GBP/EUR 17th April 2018
3Bloomberg: WIRP<GO> 18th April 2018
4Office of National Statistics (ONS), CPI March 2018 18th April 2018
5Bloomberg spot GBP/USD chart 1st January 2016 - 18th April 2018
6Citi Analyst Foreign Exchange Forecasts April 2018

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