Sterling hit by leaked Brexit memo and underwhelming inflation data

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16 November 2016

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The Pound sank against its major peers on Tuesday, with a disappointing set of inflation data and a report that the UK government has no real Brexit plan reversing Sterling’s post-US election gains.

leaked memo released on Tuesday obtained by The Times claimed that Theresa May had no overall plan for Britain’s exit from the European Union. The memo also highlighted ‘divisions with the cabinet’, although this was strongly rejected by the government. Sterling also took a hit from yesterday’s inflation data for October, which fell short of expectations. Headline inflation grew just 0.9% in the year to October (Figure 1), defying expectations for an increase on a month previous.

Figure 1: UK Inflation Rate (2013 – 2016)

Governor of the Bank of England Mark Carney also answered questions from the House of Commons Treasury Committee on Tuesday, although added little new information. Carney claimed that the BoE was not actively considering expanding the central bank’s QE programme, while suggesting that the decision to cut interest rates to a record low in August has so far had no real impact on Sterling.

Meanwhile, the US Dollar continued to go from strength to strength yesterday, rallying to a fresh 11 month high against its peers. Yesterday’s US retail sales, seen by the Federal Reserve as one of the key indicators when deciding on the next monetary policy move, increased more than expected last month. Sales were significantly stronger than expected in October, growing 0.8% in the month, with impressive upward revisions to the previous month’s data.

In the Eurozone, third quarter growth was left unrevised and the Euro was little moved as a result, hovering around its weakest position since January.

The main economic releases today are the latest UK and US labour reports for industrial production. Unemployment and average earnings are both expected to remain unchanged on a month previous.

Major currencies in detail:


Yesterday’s weak data and concerns over Brexit strategy sent the Pound 0.4% lower.

Inflation defied the sharp decline in the Pound in the past few months. Headline price growth came in at 0.9% versus the 1.1% consensus while core inflation also fared poorly, falling to just 1.2% from 1.5%.

However, this trend is expected to reverse in the coming months. Speaking at the inflation report hearings yesterday, BoE Governor Mark Carney called the pass through to prices from the fall in Sterling as ‘inevitable’.

This morning’s labour report from ONS at 9:30 UK time will be the main focal point today. Traders will also have one eye on Thursday’s retail sales figures.


The common currency declined for the fifth straight session against the Dollar on Tuesday, ending the London session 0.3% lower.

Economic news out of the Eurozone was mostly positive yesterday. The latest economic sentiment index from ZEW came in above expectations, increasing to 15.8 this month from 12.3 a month previous. Sentiment in Germany, Europe’s largest economy, was particularly impressive, with the index climbing to 13.8 from a lowly 6.2 recorded in October.

The trade surplus in the Eurozone also swelled in September. The surplus increased to €26.5 billion in September from €18.4 billion the previous month.

With economic data light in the Euro-area today, investors will turn their attention to the release of the ECB’s meeting accounts and October inflation data on Thursday.


Tuesday’s impressive retail sales sent the US Dollar index 0.4% higher during London trading yesterday.

Sales rose 0.8% in October, above the 0.6% consensus, boosted by increased demand for building materials. The core level, which corresponds most closely with the consumer spending segment of overall GDP, also increased a greater-than-expected 0.8%. We think this impressive print all but confirms that the Federal Reserve will hike interest rates for the second time in a decade at the December FOMC meeting.

Federal Reserve member Eric Rosengren added to the growing list of hawkish comments from Fed members since the election, claiming that conditions for a December hike were ‘basically there’.

A number of second-tier economic releases in the US today could shift the Dollar. Industrial production and producer prices at 13:30 UK time will both be worth watching out for.

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