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The FTSE opened the day downbeat. The pound traded higher against the US dollar, yet failed to extend gains against a stronger euro.
The UK has a crowded economic and political agenda today.
The UK’s high court will decide whether or not Article 50 could be triggered without a parliamentary vote. If the Parliament is given the constitutional power to initiate the Brexit, the pound could strengthen on expectations that the UK’s divorce from the European Union could happen in a softer political environment, and also may be delayed by months or even a year. This could give a positive spin to the pound, not only against the broadly struggling US dollar, but also against the single currency.
The Bank of England (BoE) will announce its monetary policy decision and reveal the latest growth and inflation forecasts via the quarterly Inflation Report.
The BoE’s unorthodox move post Brexit is believed to have tempered the negative shock on the UK’s economy. The UK printed better-than-expected growth in the third quarter, 0.5% quarter-on-quarter versus the consensus of 0.3%, as the latest PMI figures hinted at solid economic activity.
The significant depreciation in the pound has certainly played a role in the period following the Brexit referendum. UK businesses gained a competitive advantage; the UK stocks, especially those with a competitive dividend yield, became more affordable for foreign investors. The FTSE benefited from a period of glory.
Yet, the softness in the British pound has translated into higher inflationary pressures. The sharp increase in the price of imported goods sent the UK’s headline inflation to 1.0% on year to September, from 0.6% a month before. Retail sales stagnated over the same month, as consumer confidence deteriorated; UK citizens have lost their purchasing power in and outside of the UK.
The ‘hard Brexit’ talks have also given some headache to investors, a the UK’s business environment became uncertain. Some sectors, led by financials and real estate, took a severe hit as tensions between the UK and the EU rose. According to the latest data, the British homebuilders would have scaled back their plans over the three months following the country’s decision to leave the EU.
Hence, a cheaper pound and rising inflation have been the immediate costs of the reduced knee-jerk economic shock in the UK, winning the expectations of further monetary easing in the UK.
Although the Brexit may have not shown its true face just yet, the markets expect the BoE to revise its growth and the inflation forecasts higher. However, Governor Mark Carney will certainly sound balanced regarding the future of its monetary policy.
As of today, the market assesses less than a 15% chance for a BoE rate hike over the next twelve months.