Sterling sticks close to lowest level in three years against euro

Sterling held close to its lowest level in three years against the euro on Monday, after figures showed that inflation accelerated in July more than economists forecast.

It was the first piece of data signalling the concrete effects of the Brexit vote on the country’s economy. UK inflation in July was running at 0.6 per cent, ahead of forecasts of a 0.5 per cent increase, but there were clear indications of more price pressures to come.

Import costs

Sterling made ground against the US dollar, but remained weak against the euro as separate data also showed how a weaker UK currency since the June 23 referendum led to the biggest jump in import costs in more than four years.

Manufacturing input costs (PPI) surged at an annual rate of 4.3 per cent last month, ending 32 consecutive declines.After weeks of surveys, the inflation figures mark the first hard numbers on the economy in the wake of the Brexit vote in June.

While the full economic impact of the UK’s decision to leave the EU will take time to be seen, data this week on the labour market, retail sales and the public finances will be scrutinised for clues.

“The big surprise has come from the huge upside in the PPI figures,” which may put upward pressure on consumer prices, said Viraj Patel, currency strategist at ING Groep NV in London. “Markets are viewing this as possibly less scope for another bout of aggressive BOE easing in November.”

The pound rose 1 per cent to $1.3005 in London trading, the biggest gain since August 2nd. It fell to as low as $1.2866 Monday, the lowest since July 11th. Sterling however was little changed at 86.77 pence per euro. It earlier touched 87.25 pence, the weakest level since August 2013.

Sterling has lost more than 12 per cent against the euro since the Brexit vote, leading to warnings from IBEC that it has created a crisis for Irish exporters. Calls on the Government to act to help businesses are likely to grow in September, if the euro continues to rise towards 90p sterling.

Borne brunt

The UK currency has borne the brunt of the Brexit decision, falling to a 31-year low versus the dollar last month in the aftermath of the referendum. It also declined after the Bank of England’s decision announced on Aug. 4 to cut interest rates and boost monetary stimulus, making it the worst performer among major currencies in 2016.

What is unclear is how markets will balance the continued action of the two central banks - the Bank of England and the ECB – as they determine the sterling to euro rate vital for Irish exporters in the months ahead. IBEC has warned that if the euro rises to 90p sterling thousands of jobs will be at risk, particularly in the agri-food sector.

Consumer-price growth increased to 0.6 per cent from 0.5 per cent in June, the Office of National Statistics said on Tuesday. Analysts had forecast that the rate would stay at 0.5 per cent, according to the median forecast in a Bloomberg survey. The reading is still below the BOE’s 2 per cent inflation target, which was last reached in December 2013.

While there’s “no obvious impact” yet on headline inflation from the Brexit vote,ONS statistician Mike Prestwood said that producer-price data “suggest the fall in the exchange rate is beginning to push up import prices faced by manufacturers.”

Pound volatility

The pound has dropped about 13 per cent versus the dollar since the referendum.There will be more “pound volatility,” ING’s Patel said. “But the bottom line is that sterling will broadly brush off any good news. Markets are looking for any weakness in the hard data as a reason to sell.”

Meanwhile separate figures have showed that global investors have cut their cash holdings sharply and added to emerging market and US stocks in August as global growth expectations have rebounded, a Bank of America Merrill Lynch (BAML) survey indicated on Tuesday.

Cash levels dropped to 5.4 per cent from a 15-year high of 5.8 percent in July, the bank’s monthly poll of fund managers showed, as risk appetite picked up. A net 23 percent of investors now expect the global economy to improve over the next 12 months, an optimism reflected in the overall equity allocation recovering to a net overweight of 9 per cent.

This was up from a net 1 percent underweight last month - the first underweight in four years. Among the biggest beneficiaries of this switch were emerging market stocks, where the allocation rose to a net 13 per cent overweight - the highest level since September 2014. This was up from 10 percent last month. Emerging market equities have rallied hard since January, and are up over 15 percent year-to-date.

– Bloomberg/Reuters