Next week is a busy week for the Pound with a string of economic releases due to begin on Valentines Day. Inflation has been a hot topic in the UK since the Referendum last June and CPI and PPI data released on Tuesday could provide early signs that inflation is due to rise above the Bank of England’s target of 2%.
In any event, the weaker Pound is likely to drive inflation higher and we may see signs of this on Tuesday.
Will it lead to Sterling strength? Perhaps, but markets have heard the stark warnings from the Bank of England, they are already aware that higher inflation could become a reality for the UK. Markets aren’t bothered by this, what they are hoping is that the Bank of England will start to raise interest rates to combat higher inflation, a message portrayed recently by Kristin Forbes at the Bank of England.
The last reading for CPI in December came in at 1.6%, still below the Bank’s 2% target. However, as consumers begin to feel the pinch from higher costs as a result of a weaker Pound, we may begin to see inflation above the BoE’s target prompting potential changes to the base interest rate.
UK retail sales – Is the economy holding up post-Brexit?
December saw a significant drop in consumer activity, with retail sales down 1.6% compared with the previous year. This may be a simple anomaly, or early signs that higher consumer prices are affecting the public’s spending habits.
If Friday’s latest release reveals another fall in consumer spending markets may point the finger at Brexit and the fall in the Pound’s value. With Sterling likely to remain lower for some time there are then concerns that UK PLC could fall into recession further driving Sterling’s value down.
We may see the Pound rally on Tuesday as inflationary figures are expected to rise as products become more expensive, and further support for Sterling if retail sales can retain a foothold in this post-Brexit environment.
Unless there are shocks not catered for, such as Theresa May pushing the button on Article 50, Pound to Euro exchange rates may move higher to the 1.18 mark.
