Brexit Briefing: Pound Dithers as Consumer Spending Cools, But Rate Hike Hopes are Shifting

Talking Points:

- Fresh signs that British consumers are reigning in their spending.

- Accelerating inflation is good news for the BoE hawks and the Pound.

- Sterling stays flat against the Dollar and Euro for time being.

- See the DailyFX Economic Calendar and see what live coverage for key event risk impacting FX markets is scheduled for the week on the DailyFX Webinar Calendar.

The British Pound is struggling for momentum amid more signs that consumer spending is slowing. Credit card spending in the UK in January grew at one of the slowest annual rates of the past three years, data from Visa showed Monday, rising 0.4% year-on-year, down from 2.5% in December.

On the month, Visa said consumer spending climbed 0.5% after a 2.5% drop in December. But the data tie with other signs that Brits are reigning in their spending. The British Retail Consortium reported last week that spending in the November-January festive period rose by the smallest amount since the financial crisis, while the Confederation of British Industry said its January retail gauge dropped by the most since records began in 1983.

Official retail sales data are due Friday, with forecasts calling for an on-year rise of 3.9% in January – down from 4.9% previously – and a monthly rise of 0.7% compared to the 2% drop in December.

Economists have also been long warning that rising inflation – caused by the Pound’s post-Brexit vote fall – will squeeze peoples’ incomes in 2017 and threaten economic growth. As a result of this rising inflation “households' purchasing power will be squeezed further which, combined with relatively muted consumer confidence, may lead expenditure to settle on a slower growth trajectory in 2017," said Annabel Fiddes, an economist at IHS Markit, which compiled the data for Visa.

Any threat to economic growth is, of course, Pound-negative, as is the Bank of England’s current dovish stance on rates. Inflation is rising, but Carney and Co will only look to raise rates if it is seen to be rising faster than it expects. The Bank held rates at the record low 0.25% on February 2, stressing uncertainty in the run up to the triggering of Article 50 and that consumer spending and investment are likely to weaken this year.

However, the consensus on the BoE’s stance on rates is beginning to shift. Last week, Kristin Forbes, a member of the Bank’s Monetary Policy Committee, said she disagreed with the BoEs policy to keep rates low. She said inflation is getting out of hand and the best way to control it is by raising interest rates. She also said the robust performance of the economy in the wake of last June's Brexit vote confirms her gut feeling that the UK would ride out the referendum better than most economists expected. That’s backed up by news today that the FTSE 250 (which is far more domestically focussed than the 100) reached a fresh record high this morning, dispelling much fear of economic peril upon activating Article 50 next month.

And many economists seem to be agreeing with Forbes. According to a Bloomberg survey, 87% of analysts think that the BoE’s next move, after its current neutral stance, will be an interest rate hike, up from 65% a month earlier.

Inflation data released tomorrow is forecast to show consumer-price growth accelerated to 1.9%, the fastest since 2014. If that data, along with employment data, surprise to the upside the markets may again bring forward their rate-hike expectations, thus boosting the Pound.

But Brexit is still a concern for many. More than a quarter of employers in Britain say staff members from other European Union countries have considered leaving their firms or the country in 2017 after last year's Brexit vote, the Chartered Institute of Personnel and Development said Monday.

And the shifting rate hike expectations – nascent as they are – have failed thus far to give Sterling pairs much impetus. The British Pound has remained flat against the US Dollar in Monday trading. GBPUSD currently trades at 1.2492, up 0.02% for the day. Sterling has also been able to capitalise on the weak Euro, which remains under pressure from stubbornly low inflation and political concerns. EURGBP currently trades at 0.8487, a drop of 0.38% on the day.

Markets

Upcoming Event Risk

--- Written by Oliver Morrison, Analyst

To contact Oliver, email him at oliver.morrison@ig.com

Don't trade FX but want to learn more? Read the DailyFX Trading Guides