Brexit depreciated pound, increasing cost of living for Britons
The pound is trading near 10-month highs after the UK government led by Prime Minister Theresa May acknowledged the financial obligations to the European Union after Britain is allowed to exit. The message was seen as a less combative tone than was seen earlier which could actually produce a better outcome as the probabilities of a trade agreement rose. The Brexit referendum vote had a surprise outcome with uncertainty putting downward pressure on the pound as imported goods became more expensive overnight and inflation shot up.
The drop in the pound has hit British households as the pace of inflation has outgunned wage growth, leaving real wage growth in negative territory for 2017. The Office for National Statistics will publish the British consumer price index (CPI) on Tuesday, July 18 at 4:30 am EDT. Inflation was 2.9 percent last month and analysts are forecasting a repeat of that print, but there is risk it could end up at 3 percent.
The Bank of England (BoE) has been divided on how the central bank should deal with current economic conditions. BoE Governor Mark Carney and Deputy Governor Ben Broadbent have been vocal about keeping rates at current levels despite rising inflation. Hawks lost an important member when Kristin Forbes left the rate setting committee in June with a final 5 to 3 vote to keep rates unchanged. Chief Economist Andy Haldane is on the rate hiking camp but will have to recruit more votes to his side and if inflation persists at current high levels that could happen sooner rather than later.
The GBP/USD lost 0.344 in the last 24 hours. Cable is trading at 1.3055 ahead of the release of the British consumer price index. BoE doves have thrown cold water to the idea of a rate hike even as inflation continues to heat up, but the pound has gotten support from a softer more conciliatory approach to Brexit from PM May. Acknowledging there will be a bill to settle after the UK leaves the EU could result in a more amicable divorce, reducing the probabilities of the worst case scenario outcomes.