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Sterling Tumbles amid Accelerated Inflation in UK

7/19/2016

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​The British pound (GBP) fell on Tuesday despite official data posting an accelerated inflation in June.

Markets are also looking ahead to the International Monetary Fund (IMF) to slash economic forecasts in the wake of June 23's referendum vote which ultimately decided for the UK to leave the European Union.

GBP initially limited losses on the inflation rise and even managed to pass $1.32, but it was only temporary. 

GBP/USD was down 0.55% to 1.3181 at 09:01 AM GMT, close to levels prior the release. At the same time, EUR/GBP rallied 0.47% to 0.8392.

Sterling previously hit an intraday peak on Monday, after one Bank of England (BoE) policymaker said he was uncertain if he would support a rate cut at the central bank's August meeting. These comments contrasted those of other BoE policymakers’ opinions.

In Thursday’s minutes of the central bank’s meeting, policymakers clearly indicated that the bank will ease monetary policy in August to counteract the economic shock brought by the Brexit vote. BoE put interest rates on hold at 0.5% in a shock vote.
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Accelerated Inflation in the UK

The Office for National Statistics (ONS) reported that the rate of consumer price inflation (CPI) in the UK rose a seasonally adjusted 0.5% last month, above estimates for a 0.4% increase and compared to May's 0.3% gain.

Economists expect accelerating inflation in the coming months as a falling sterling supports import prices.

​According to economists also, BoE officials will announce their latest predictions for CPI, which may temporarily top the central bank’s 2% target in 2017 due to a weaker currency.


Sterling dropped over 10% against the greenback since June 23.

The acceleration in annual inflation was triggered by airfares gains as football fans traveled to France for the 2016 European Championships, and higher prices in some items such as fuel, video games and telephone services is another reason.

Wholesale prices fell year-on-year in June, with prices charged for manufactured goods at the factory gate declining 0.4% in comparison with 2015. Firms’ raw material costs tumbled 0.5%.
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UK Economy after Brexit

UK’s credit worthiness was pulled negatively due to the Brexit vote, Moody published. This report by the credit rating agency was posted ahead of the IMF’s own forecasts.

The report also said that medium-term growth prospects for the British economy could be weaker if it does not acquire a new trade agreement with Europe, and that there will be a massive slowdown in growth in the near-term.

Moody forecast UK’s growth to be 1.5% this year and nearing 1% in 2017.

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