UK: Near-term turbulence for sterling – ING

There's turbulence ahead for the pound as key UK data releases collide with Brexit and geopolitical noise, according to Viraj Patel, Research Analyst at ING.

Key Quotes

“While markets are in the midst of summer holiday mode, the combination of key UK data releases, as well Brexit and geopolitical headlines, may present some near-term turbulence for GBP markets. On the data front, there are three key reports to note next week:

• CPI report (Tue 15th Aug): After coming in surprisingly softer last month - and denting August Bank of England rate hike expectations - our economists expect annual headline inflation to pick up to 2.7% as GBP weakness continues to feed through into higher food prices. Utility price hikes are also beginning to take effect. Equally, core inflation could rebound to as high as 2.6%. While this is likely to raise some eyebrows among the MPC hawks, we would caution that part of this increase is also due to the transitory effects of a weaker currency. Given that domestically generated inflation overall is likely to remain muted for some time, we suspect any subsequent move higher in short-term UK rates and GBP - as a result of greater BoE tightening sentiment - may prove short-lived.
• Labour market report (Wed 16th Aug): Those looking to wage growth as evidence for rising underlying price pressures are unlikely to find much support in the latest jobs report. We expect average hourly earnings growth to remain unchanged at 2% in June - and stay pretty much anchored at this level for the rest of 2017. This may not come as too much of a surprise to markets given that it would be in line with the BoE's latest forecasts outlined in the August Inflation Report. The bigger question, however, is whether wage inflation can pick up to 3% in 2018 as the Bank estimates; such a sharp uplift in earnings growth is unlikely in our eyes given greater signs of slack in the labour market.
• Retail sales report (Thu 17th Aug): Our view for a more cautious BoE policy bias would be reinforced by a disappointing July retail sales report. While the second warmest June on record got UK consumers out spending at the start of summer, a range of factors, including waning confidence and less credit-card spending, suggest households are cutting back on non-essentials as the squeeze on real incomes takes effect.”

“Reports in the media also suggest the UK government is set to release position papers on key Brexit issues in the next few weeks. Of particular economic interest will be the UK's proposals for replacing the customs union and achieving 'frictionless trade' with the EU. We could also receive clarity on the type of transitional deal the UK is willing to seek, notably the length of any transition period and willingness to replicate existing arrangements.”