Can May Wrest the Initiative from Failing Brexit Talks and Save Sterling?

GBP/USD is trading in the 1.31 – 1.33 range, with a 52-week low of 1.19952 and a 52-week high of 1.36158. The cable is under pressure from rising inflation, but mitigating factors in the form of an interest rate hike are helping to keep sterling at inflated levels. On Tuesday, 17 October 2017, UK CPI (Consumer Price Inflation) data was released, indicating an uptick from 2.9% in August to 3.0% in September. This marks the highest rate of inflation for the UK economy since April 2012.

Snapshot of the UK Economy: Low Interest Rates and Rising Inflation

The UK economy has been subject to historically low interest rates for well over a decade. The bank rate is currently at 0.25%, but expectations of a rate hike are growing as inflation keeps creeping higher. The Bank of England currently has a quantitative easing asset purchase program valued at £435 billion per month, with corporate bond purchases of £10 billion per month. The next meeting of the Bank of England MPC for interest rates and QE asset purchases is November 2, 2017.

In the UK, a weak GBP has resulted in rising costs of imported goods and services creating an inflationary environment. Since the Brexit referendum on June 23, 2016 GBP/USD has depreciated sharply, in addition to GBP/EUR and other currency pairs. BOE governor Mark Carney believes that it will take several years for the depreciating currency to finally work its way through the UK economy. Real earnings in the UK are falling while inflation is rising – this has resulted in pressure on the Bank of England to raise interest rates.

May Struggling to Win Support and Push Brexit Agenda

Meanwhile, British Prime Minister Theresa May has just 18 months to negotiate an agreement for the UK to exit the EU. British businesses are deeply concerned about their future prospects, given that Brexit negotiations are going nowhere fast. Prime Minister May’s direct involvement in the process has done little to assuage concerns about Brexit proceedings since Article 50 of the Lisbon Treaty was triggered in April 2017. Her inability to win over the support of conservatives and the general populace is making it difficult for her to accomplish her objectives. There are two opposing paradigms at play – Brexiteers in favour of a hard Brexit and those in favour of a soft Brexit.

Additionally, Prime Minister May is struggling to make good on a promise to lead Britain safely through a Brexit as she fights to retain her position as head of government. According to the Center for European Reform (CER) Director, Charles Grant, the situation in Britain is confusing and Europeans are unaware who speaks for the UK government. SNP investments analyst Charles Montgomery Bellwether is upbeat on trading prospects for UK-related investments.

‘The FTSE 100 index continues to gain ground as GBP weakens. At 7,546+, the all-share index is trading near record levels. Call options on indices and key UK sectors remain a hot favourite among investors. Also, wage growth in the UK has risen 2.2%, but lags inflation at 3%. This is creating additional pressures on personal disposable income levels in the UK. A weak GBP means that the foreign-based earnings of listed companies are worth more domestically.’

It remains uncertain whether Prime Minister Theresa May and Bank of England governor Mark Carney can hold back the Brexit Tidal Wave. Pressures are mounting from all directions, and decisive leadership is needed to turn things around.