Soft Brexit? Labour And Conservatives “In Secret Talks”

Soft Brexit? Labour and Conservatives “In Secret Talks”

Despite seeing a heavy sell-off in response to the news last week that the Conservative party had failed to gain a majority in the snap elections, called by party leader and PM Theresa May, GBP has since stabilized and had started to rebound higher, before reversing and moving lower again today. So, what is going on?

There are two three drivers of the current recovery price action in Sterling:

Inflation & Wages

Firstly, the latest inflation data release yesterday showed that CPI rose to 2.9% over May. This marks a further increase from the 2.7% level seen in April and takes headline inflation back to its highest level since June 2013. Core inflation rose also, rising 0.3% from 2.4% in April to 2.7% in June.

Here is a breakdown of the data:

CPI inflation rose 0.2pp to 2.9% in May, the highest level in just
over 5 years, with a rise in recreational goods prices the main driver
of the headline increase.

Higher costs of package holidays, PC games and
PC equipment, after the decline in GBP, were the main factors behind
rise, which accounted for 0.2pp of the 0.17 change in the yearly rate.

Pipeline inflation showed continued signs of abating in May, with the
6% y/y rise in input materials the lowest since last September.

The biggest contributor to this annual change came from crude oil, which
contributed -2.63pp to the 12-month change. Factory gate inflation held
firm at 3.6% y/y in May.

Following the release, we also had the release of earnings and employment data which showed that wage growth has fallen yet again, printing 2.1% in the 3 months to April. This latest fall-back in wage growth compounds the effect of rising inflation on British workers and is likely to weigh heavily on consumer activity.

Traders now await the latest assessment from the Bank of England on Thursday. Despite the persistent increase in inflation, political uncertainty is likely to keep the bank on the sidelines for now as markets await details of who will form the next government. A swift resolution to this matter could, however, put the focus on the BOE to address the inflationary environment sooner rather than later. Indeed, if political uncertainty persists then GBP is likely to fall further, fueling more inflationary pressure.