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Inflation worries over weak pound
Published on 04.10.2016 22:21

The pound tumbled to a new 31 year low against its US counterpart today with some analysts predicting that the sudden fall in the currency is likely to boost inflation.

At 5.32pm (GMT) the British currency was trading at $1,2737 down from $1,2841 in yesterday’s trading.

With the pound in freefall, import prices are skyrocketing which will inevitably cause an inflationary environment moving forward,

While sterling’s depreciation “is certainly helping the economy to find a new equilibrium,” the higher import prices it generates “mean inflation is likely to rise materially over the coming months,” wrote John Wraith, head of U.K. rates strategy at UBS Group AG in London,  

“Risks are for a weaker pound” assuming the Bank of England continues to press ahead with policy easing to help the economy, he added.

The pound may come under further presure in the nearest future as the market digests the news that British Prime Minister Theresa May is willing to sacrifice the European single market in order to control immigration,

"It is now abundantly clear that access to the single market is not on UK Prime Minister Theresa May's list of top priorities and the market is realizing that, there is more pressure for the pound in the weeks and months ahead," said UniCredit's Global Head of FX Strategy, Vasileios Gkionakis.

The pound tumbled to a new 31 year low against its US counterpart today with some analysts predicting that the sudden fall in the currency is likely to boost inflation.

At 5.32pm (GMT) the British currency was trading at $1,2737 down from $1,2841 in yesterday’s trading.

With the pound in freefall, import prices are skyrocketing which will inevitably cause an inflationary environment moving forward,

While sterling’s depreciation “is certainly helping the economy to find a new equilibrium,” the higher import prices it generates “mean inflation is likely to rise materially over the coming months,” wrote John Wraith, head of U.K. rates strategy at UBS Group AG in London,  

“Risks are for a weaker pound” assuming the Bank of England continues to press ahead with policy easing to help the economy, he added.

The pound may come under further presure in the nearest future as the market digests the news that British Prime Minister Theresa May is willing to sacrifice the European single market in order to control immigration,

"It is now abundantly clear that access to the single market is not on UK Prime Minister Theresa May's list of top priorities and the market is realizing that, there is more pressure for the pound in the weeks and months ahead," said UniCredit's Global Head of FX Strategy, Vasileios Gkionakis.

The material published in on this page is produced by the FIBO group companies, and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC; furthermore it has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

Andrew Masters

Analyst

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