GBP: Eye of the inflation storm - ANZ

The BoE’s decision to revise its guidance on the potential for a near-term rate increase has weighed on sterling, according to Brian Martin, Research Analyst at ANZ.

Key Quotes

“That has been particularly noticeable on the crosses, including the AUD and NZD. Against the EUR, the GBP has made new cyclical lows.’

“As base effect from sterling’s post-referendum slump start to abate, there is growing evidence that inflation may be in the process of peaking, whilst there is no evidence of a broader acceleration in underlying inflation pressures. That assessment prompted a more dovish tone from the BoE in August, with the central bank now anticipating that the first rise in the bank rate won’t come until around Q3 2018. That frank assessment of inflation and interest rates has weighed on the pound recently, but we think it would be a mistake to become too bearish on the UK’s economic prospects at this stage. If inflation starts to subside in coming months, that will provide some boost to real  incomes, which would support private consumption growth (Q2 +0.1% vs Q1 +0.4%). Meanwhile, investment seems to be holding up, rising 0.7% q/q in Q2 vs 1.0% q/q in Q1. Momentum in the labour market is firm, and average earnings are showing signs of basing.”

“Spot valuations suggest sterling is cheap. However, much will depend on how resumed Brexit talks with the EU go.”