Fundamental Forecast for GBP: Neutral

British Pound trading has been particularly erratic over the past week, with the trend broadly higher but Thursday in particular seeing a very sharp fall followed by an equally sharp rise. That pattern of extreme movements in both directions could well continue in the week to come as the twin themes of monetary policy and Brexit continue to buffet the currency.

Looking at the economic data first, Tuesday’s inflation numbers are likely to be the highlight, with economists expecting an increase from 2.9% to 3% – a full percentage point above the Bank of England’s target and the level at which Bank of England Governor Mark Carney has to write a letter of explanation to UK Chancellor of the Exchequer Philip Hammond.

On the same day, Carney is due to give evidence to the House of Commons Treasury Committee, giving him the perfect opportunity, if he wishes, to prepare the ground for a tightening of UK monetary policy on November 2. That’s the day when the Bank’s Monetary Policy Committee announces its decision on interest rates, publishes the minutes of its meeting and releases its quarterly Inflation Report. The MPC is widely expected to double Bank Rate to 0.5% to combat rising inflation.

However, the committee’s policy-makers will also have to keep an eye in the coming week on figures for unemployment, average earnings, retail sales and public borrowing, knowing that any signs of a weakening economy would make a rate rise more difficult to justify. Note, for example, that a very weak set of retail sales numbers for September is forecast and that public-sector borrowing likely rose.

An additional problem for the Bank is that the Brexit talks seem to be going nowhere. The EU’s chief negotiator Michel Barnier talked last Thursday of an “impasse” and – interestingly – Brexit is the very last item on the agenda of the European Council, which meets on Thursday and Friday. The Council is made up of the EU heads of state and government, who “will review the latest developments in the negotiations following the United Kingdom’s notification of its intention to leave the EU” without the UK even being in the room.

Again, the Bank of England could decide that this makes a decision to hike rates too risky, although there were signs last Friday that other EU members have begun to talk among themselves about a possible transitional deal for the UK and are looking for a way to start discussing trade issues without undermining Barnier and his team.

Finally, internal UK politics remain a concern. Prime Minister Theresa May has succeeded in seeing off a challenge to her leadership but now Chancellor Hammond is in the spotlight after a call by former Chancellor Nigel Lawson for him to be sacked, saying he was unhelpful to the Brexit process. UK support for a no-deal Brexit also appears to be rising in response to what is seen by hardliners as EU intransigence in the negotiations.

This all makes trading the British Pound particularly difficult at the moment and something perhaps best avoided by beginners after the past week’s gyrations.

Chart: GBP/USD Hourly Timeframe (October 6 – 12, 2017)

Chart by IG