UK inflation data released this morning revealed the rate has stayed the same as the month of July, falling short of the expected level. Analysts predictions had seen inflation rising from 2.6% to 2.7%, however this was not the case. The news this morning has caused the GBP/EUR exchange rate to fall to an 8-year low. The last time Sterling reached this level against the Euro was just after the financial crisis.
There was optimism before the release as the markets would have been pleased to see inflation rise as it would have brought back some hope of an interest rate hike. It now looks unlikely that the Bank of England will decide to raise interest rates in the near future.
Despite the disappointing inflation data the UK Government seem to be making some progress with their plans for Brexit, suggesting a temporary customs union with the EU.
Whilst the European Union may not be overly welcoming of the idea, it does show the UK are attempting to find a solution. At the moment there is considerable concern that UK businesses face a “cliff edge” scenario where the rules and regulations will all of a sudden change. If there was to be some certainty around plans that positivity could result in some gains for Sterling.
Morgan Stanley Parity Concerns
The investment bank Morgan Stanley have forecasted that the GBP/EUR rate could fall below parity in 2018, which would be the first time ever. Whilst slightly speculative and worth pointing out many banks suggested parity would have been achieved by Christmas 2016 after Brexit, it does raise some concerns.
There is such a negative sentiment towards Sterling at the moment, and it looks set to continue. I wouldn’t be surprised if the demise of Sterling to just simply continued. The predictions of parity for the Pound versus the Euro was something mooted by HSBC back in 2016 and at the time was seen as outrageous. However, with the Pound on such a negative spiral and the Euro strengthening, there is a possibility.