October – December 2018 Currency Forecast – Factors to watch in the UK

With just over five months now until the UK withdraws from the
European Union, it is imperative that more is done to agree a
deal in the immediate future. At the start of October, the Dow
Jones reported that a Brexit divorce deal could be agreed within
a week, but that proved to be wide of the mark. Investors have
repeatedly jumped on any signs of a breakthrough, but when
details have failed to materialise, they have sold sterling. That
explains why the pound has been extremely volatile of late, with
no signs of calmer waters anytime soon.

Brexit: It is clear that the UK’s withdrawal from the EU will be the chief economic factor to look out for in the next quarter and probably beyond that too. Since the UK formally triggered the Brexit process by giving notice under Article 50 of the Lisbon Treaty, the pound has suffered more than a 20-cent GBP/USD swing between the highs and lows and almost a 13-cent GBP/EUR swing. A raft of British businesses have issued hard Brexit warnings, but we’re still no closer to agreeing a deal. We should always bear in mind that any economic impacts that have come about since the UK voted to withdraw
from the EU are not the full story; we will only begin to get a real sense of the impacts when we have officially left.

UK economy: The UK economy failed to grow in August which was worse than
the paltry 0.1% growth economists had forecast. On the same day, the International Monetary Fund reported that the UK’s public finances are among the weakest in the world, with only Portugal being in a worse state. We are now firmly into the final quarter of the year, but we will have to wait until 9 November to see the preliminary estimate of the UK’s GDP growth rate for the third quarter of 2018. Last time around, the year-onyear figure was 1.2% and some are already predicting a nudge up to 1.4%. That would certainly be welcome news, but as with all things of this nature, we will have to wait and
see what the actual figure is.

Inflation: On 19 September, we learned that the UK inflation rate in August jumped to 2.7% from 2.5% the previous month. It was the highest mark for six months and analysts had actually expected a dip to 2.4%. The year-on-year rise in CPI in August meant that the gap between inflation and wage growth was narrowing which put pressure on UK households. However, we have since learned that wage growth rose by 3.1% in the three months to August – the highest pay growth in almost a decade. The day after, new inflation figures showed a drop to 2.4% in September. Not only will this ease the cost of
living burden, but it could convince the Bank of England to delay a rate hike. It will be interesting to see how inflation fares in the last three months of 2018.

Leave a Reply

Your email address will not be published. Required fields are marked *