GBP movement to be driven by Brexit and BoE Speculation in 2018

Philip McHugh December 27th 2017 - 2 minute read

  • Brexit to remain key influence on GBP
  • BoE monetary policy likely to weigh on Sterling in 2018
  • Wage growth and inflation to hamper growth?

Brexit trade negotiations to dominate GBP in 2018

The pound is likely to remain extremely politically sensitive over the coming year as Brexit talks move to the second stage and the difficult task of negotiating the UK’s future relationship with the EU finally gets underway.

Despite accepting the UK’s exit agreement earlier this month the EU sought to delay the second stage of Brexit negotiations until March, much to the chagrin of many a Brexiter and investor alike.

However the start of these talks may not breathe the life into Pound that some markets may hope, with many observers suggesting that they will prove to be significantly more difficult than negotiating the UK’s exit.

The main focus during the second phase will undoubtedly be on how the future UK/EU trade deal will look, especially in regard to the single market and whether the UK government will make some compromises in an attempt to retain access.

Another focus will on whether Theresa May is able to secure a transitional deal – something which should help UK firms better prepare for life outside the EU.

UK wage gap to grow in 2018?

A major concern for many GBP investors over the last twelve months has been rocketing inflation and stagnant wage growth, which has been slowly eroding household purchasing power in the UK, something that currently looks set to continue into 2018.

It is feared that the continued pressure on household finances will eventually lead to a notable drop in consumer spending as families continue to watch their pennies.

With consumer spending accounting for a sizeable part of the UK’s all-important services sector, investors are worried that the wage gap could drag on growth.

However with the UK now nearing full employment, some analysts are hopeful that wage growth could pick up in the New Year, helping to alleviate some of these concerns.

BoE monetary policy expected to remain on hold next year

Another factor likely to impact Sterling in 2018 will be the Bank of England’s (BoE) monetary policy decisions, with the bank’s current outlook suggesting that it is likely to remain cautious in the face of Brexit uncertainty.

BoE Governor Mark Carney has frequently stated that Brexit is one of the biggest threats to the UK’s financial stability and he is likely to want to avoid making any commitments on monetary policy in order to remain flexible.

However Carney may come under increasing pressure to raise interest rates again in 2018 if inflation continues to push higher over the next few months, with markets likely to call on the BoE to hike rates in order to prevent the UK economy from overheating.

Upcoming Data

Wednesday, 27 December, 2017
09:30                     GBP BBA Mortgage approvals Nov
15:00                     USD Consumer Confidence Dec

Thursday, 28 December, 2017
07:00                     GBP House Prices Dec
13:30                     USD Advance Goods Trade Balance Nov

Friday, 29 December, 2017
13:00                     EUR German Inflation Dec

Written by
Philip McHugh

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