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The pound dives after Carney pours water on the prospect of a rate hike

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Sterling dropped to its lowest point since April on Tuesday after Governor of the Bank of England Mark Carney said that interests rates should not be raised any time soon.

Carney said borrowing costs should not go up before there is a clear picture of how the Brexit talks will play out during a speech made at London's Mansion House. 

Although sterling fell this morning after the speech, it fell even further on Tuesday afternoon after the DUP reported that talks with Prime Minister Theresa May had not gone as they had expected.

The pound dropped 1.04% to $1.2606 as of 16:15 p.m. BST (11:15 EST).

Screen Shot 2017 06 20 at 16.14.26

"Given the mixed signals on consumer spending and business investment, and given the still subdued domestic inflationary pressures, in particular anaemic wage growth, now is not yet the time to begin that adjustment," said Carney.

"In the coming months, I would like to see the extent to which weaker consumption growth is offset by other components of demand, whether wages begin to firm, and more generally, how the economy reacts to the prospect of tighter financial conditions and the reality of Brexit negotiations," he said.

Carney's comments come after three members of the Bank's Monetary Policy Committee last week voted to increase rates, shocking investors who had expected just one member, the outgoing Kristin Forbes, to back tightening policy.

The Chancellor, Philip Hammond, spoke alongside Carney, noting that Brexit negotiations should include a transitionary period in which the UK will be outside the customs union but will still abide by customs union rules. 

The speeches weree originally scheduled for last Thursday, but the City of London corporation cancelled the event following the Grenfell Tower disaster.

"Investors today will focus on what BoE’s Mark Carney has to say after three MPC policymakers voted to raise interest rates last week, " said Hussein Sayed, chief strategist at FXTM. "Rising prices and falling wages is one of the biggest challenges a central bank can face, and investors need more clarity on what tools are available to tackle these problems," he said.

"With Brexit negotiations now officially underway, it will be interesting to see whether sterling remains as vulnerable to the constant flow of updates and commentary, especially given the friendlier tone that both sides adopted on day one," said Craig Erlamn, senior market analyst at Oanda.

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The pound has jumped after one of the Bank of England's top staff indicated he could back a rate hike

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LONDON — The pound has jumped early on Wednesday afternoon after one of the Bank of England's key policymakers signalled that he is close to backing a hike in interest rates.

Speaking in Bradford, Andy Haldane, the BoE's chief economist, and a member of its Monetary Policy Committee said that a "partial withdrawal of the additional policy insurance the MPC put in place last year would be prudent relatively soon," effectively saying that he is almost ready to increase rates.

That buoyed investors in the pound, with the currency jumping from virtually flat to a gain of close to 0.5% on the day. Here's how that looks, as of around 12.20 p.m. BST (7.20 a.m. ET):

Screen Shot 2017 06 21 at 12.21.55

Prior to Haldane's speech, sterling was broadly flat after the Queen delivered Prime Minister Theresa May's legislative plans for the next parliamentary session in her speech at the State Opening of Parliament, leaving out several key promises from the Conservative Party's manifesto.

May was widely expected to make concessions from the election manifesto in order to get the legislative programme through the house and allow her to create a new government after she failed to secure a majority.

Earlier on Wednesday, the pound dropped to a new post-election low, dragged lower by Bank of England Governor Mark Carney's assertion on Tuesday that interest rates should not increase anytime soon.

Sterling's fall on Wednesday morning followed on from a big drop on Tuesday. The currency tumbled more than 1% during trade on Tuesday after Carney told financiers at London's Mansion House that he does not believe interest rates should be increased, saying: "From my perspective, given the mixed signals on consumer spending and business investment, and given the still subdued domestic inflationary pressures, in particular anaemic wage growth, now is not yet the time to begin that adjustment."

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The pound is flat after a rollercoaster day on Wednesday

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LONDON — The pound is little moved on Thursday as investors take a breather from a manic day for the currency on Wednesday when sterling slumped and jumped numerous times.

Sterling rode a rollercoaster on Wednesday, slumping during early morning trade to hit a new post-election low, before recovering ahead of the Queen's Speech and then jumping after Bank of England Chief Economist Andy Haldane said that he is almost ready to back an interest rate hike, contradicting comments made by his boss, Governor Mark Carney, the previous day.

Consequently, the pound is treading water, down less than 0.1% as of 8.35 a.m. BST (3.35 a.m. ET) to trade at $1.2660, as the chart below illustrates:

Screen Shot 2017 06 22 at 08.35.10

The pound could be shaken from its slumber later on Thursday with rumours circulating that Prime Minister Theresa May could be set to provide some clarity on the future status of EU citizens living in the UK as Brexit talks enter their fourth day.

Earlier reports had suggested that Britain is planning to make a "very generous" offer on post-Brexit rights for the three million EU citizens who live in the UK. Any such move would likely be seen by the markets as something of a softening of the government's Brexit stance, and therefore a positive for the currency.

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ROLLERCOASTER: Everything that has happened to the pound in the year since the Brexit vote

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Theresa May

LONDON — Friday marked exactly one year since Britain went to the polls and voted to leave the European Union, shocking the world and causing a market meltdown the scale of which had not been since the financial crisis.

The morning after the referendum, when the result became clear, the pound's movement was perhaps the most obvious sign of this market madness. Sterling dropped more than 10%, suffering the biggest single-day fall for a major currency since the Second World War, and hitting a low against the dollar that had not been seen in 31 years.

Sterling dropped from being worth close to 1.48 against the dollar to around $1.32, and also plummeted against the euro, costing forex traders millions and making the average Brit's trips abroad a whole lot more expensive.

Since that day, sterling has ridden something of a rollercoaster, enduring wild swings in value, a flash crash and a shift from being driven by economic data releases, to moving on political developments, especially those related to Brexit.

Business Insider decided to take a look at all the major developments in sterling since the vote. Strap in.

June 24, 2016

Sterling dives off a cliff, losing around 3% of its value after early results show the northern city of Sunderland voting more heavily for Brexit than had been expected. That was taken as a sign that the Leave campaign might be victorious.

As more results rolled in the pound continued to tank, losing more than 10% at its lowest point. By the end of the day, the currency had recovered a little and was down only 8 or so percent.



June 27, 2016

After a weekend where the world tried to make sense of the vote's implications, sterling resumed its crash the next Monday, dropping another 3% to a new low against the dollar.Chancellor of the Exchequer George Osborne warned in a speech on the day that markets faced more volatility, but that the UK's financial sector was ready to deal with it.



July 3, 2016

HSBC strategist David Bloom and his team write a note saying that the pound is stuck in "limbo land."

"Robust consumer data and a less-dovish BoE may cause the market to alter its view on UK rates, driving GBP higher. If the opposite is true, and consumer data are worse than expected, GBP would move lower," they argue.

Consumer data would prove to be better than expected over the coming months, but sterling would not recover substantially as forecast. 



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This depressing calculator will show you how much poorer Brexit-driven inflation will make normal Brits

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calculator

LONDON — Britain's statistical authority, the ONS, has created an insightful if slightly depressing tool that allows people to calculate just how much poorer they'll be by the end of the year thanks to the Brexit-driven inflation seen in the year since the referendum.

Since the vote, inflation in the UK has surged to its highest level since the summer of 2013, reaching 2.9% at the latest reading earlier in June. That inflation has been triggered almost entirely by the sharp fall in the value of the pound, which has crashed from a value of 1.48 against the dollar prior to the referendum, to around $1.27 now.

Prices are now rising across the board thanks to the fall in the pound seen since last summer's referendum, with food prices increasing particularly rapidly.

At the same time, however, wage growth remains subdued, with wages increasing by 2.1% including bonuses, and by 1.7% excluding bonuses at the ONS' last update.

That combination adds up to the average real wage for the average British worker actually falling.

Bank of England Governor Mark Carney nailed the problem during a press conference in May, saying: "This is going to be a more challenging time for British households over the course of this year, real income growth — to use our terminology — will be negative. To use theirs [layman’s] wages won’t keep up with prices for the goods and services they consume."

The ONS' calculator, which is embedded below, is pretty straightforward. Input your salary, click "Submit" and see how much poorer Brexit's first round impacts will make you.

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DEUTSCHE BANK: Here's what will happen to the pound when the Bank of England takes its 'momentous step'

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Bank of England Governor Mark Carney holds a new plastic £5 note as he visits Whitecross Street market in London.

LONDON — An interest rate hike from the Bank of England would provide little more than a temporary boost to the beleaguered pound and investors should remain bearish on the currency, new research from Deutsche Bank argues. The analysis is counterintuitive because currencies normally rise in value as their central banks increase interest rates, encouraging savers to hold cash inside banks to collect that interest.

With a rate hike looking more likely than at virtually any other time in the past seven years, DB Macro Strategist Oliver Harvey wrote to clients on Tuesday to explore what that potential hike would mean for Britain's currency, which has endured a horrible 12 months since the vote to leave the European Union last June.

Harvey has a four-part forecast for sterling in the event that the BoE moves rates up from 0.25% to the 0.5%. The rate last stood at 0.5% between the financial crisis and the bank's emergency rate cut last August.

1. First up, Harvey notes, the pound is "highly sensitive to rate spreads." As it stands, he says "correlations between the pound and front-end rates are on the rise." That chart can be seen below:

pound rate spread correlation

2. Harvey's second line of argument is that the pound does not generally see a great deal of strength in the lead-up periods where the bank is raising rates — so-called "hiking cycles," but does do well once that period has started.

"Sterling performance around Bank of England hiking cycles has been ambiguous at best. Since the inflation targeting regime was adopted in 1992, the pound has weakened into hiking cycles three times out of five," Harvey argues.

"By contrast, sterling tends to outperform after the cycle has already begun."

3. The Deutsche strategist's third point is that only the most optimistic forecaster would be likely to think that a rate hike from the bank anytime soon would signal the start of a new tightening cycle. Instead, any hike will effectively just be removing the emergency backstop put in place by the BoE after the Brexit vote.

"There is a difference between a withdrawal of last year’s emergency rate cut, and a full hiking cycle. Rhetoric from Haldane last week suggested that he saw the former as more appropriate," Harvey writes.

"Market pricing has so far been consistent with this view, with the front-end selling off sharply, but little in the way of pricing further out the curve."

Here's the chart:

Screen Shot 2017 06 28 at 07.57.42

4. Finally, Deutsche Bank argues, "rising UK interest rates should be set against tightening policy elsewhere," something that will effectively dampen any big upward moves in the UK exchange rate.

"If growth remains robust and the MPC hike, this should at least be partially offset by tighter ECB policy, in the form of tapering or a deposit rate hike."

With all things considered, Deutsche Bank forecasts a jump in the value of sterling after any hike, but that jump will be shortlived.

"Given the above, we can’t see a late summer or autumn hike as providing anything more than a temporary support for the pound, and retain our bearish trade recommendation from May’s Blueprint."

The bank does not provide a specific number in its forecast, but emphasises that it retains its bearish view on the currency.

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Mark Carney hints he could be close to voting for a rate hike — and the pound has taken off

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Mark Carney TUC

The value of the pound is jumping on Wednesday afternoon after Bank of England Governor Mark Carney hinted that he could be close to voting for a hike in interest rates during a panel appearance.

"Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional," Britain's most senior monetary policymaker said while speaking on a panel at the European Central Bank's Forum on Central Banking in Sintra, Portugal.

As recently as last week, Carney, who is one of the more dovish members of the bank's Monetary Policy Committee, said that he was not ready to vote for a rate hike, but on Wednesday he sought to clarify his position, effectively saying that he would be ready to vote for a rise in rates if business investment begins to rise offsetting weaker consumption in the process.

If and when he votes to increase rates "will depend on the extent to which weaker consumption growth is offset by other components of demand including business investment, whether wages and unit labour costs begin to firm, and more generally, how the economy reacts to both tighter financial conditions and the reality of Brexit negotiations," Carney said

Carney's comments were taken positively by the market, with investors buying heavily into the pound as the governor spoke. Sterling jumped by close to 1% during Carney's speech, passing comfortably above 1.29 against the dollar.

The chart below shows how sterling looks as of 2.50 p.m. BST (9.50 a.m. ET):

Screen Shot 2017 06 28 at 14.51.05

 

Carney's words on Wednesday further muddy the picture when it comes to the UK's future interest path, with a growing divide emerging on the Monetary Policy Committee.

Several members of the bank's rate-setting Monetary Policy Committee have spoken publicly in recent days, and it is very clear there is a big split in the thinking of the committee's members.

That became even more clear earlier on Wednesday when Jon Cunliffe, who sits on the MPC as deputy governor for financial stability, made clear that he does not support a rate hike anytime soon, citing concerns about slowing consumer spending, which he believes currently trumps the surging inflation caused by the pound's slump since the referendum — which has itself been a driver of slowing spending.

Carney's comments appear to make things even more difficult to predict.

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The pound and the euro jump as Carney and Draghi appear hawkish

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Mark Carney and Mario Draghi

LONDON — The pound and the euro are rallying on Thursday morning after hawkish comments from both Bank of England Governor Mark Carney and ECB President Mario Draghi in the last couple of days.

Draghi hinted on Tuesday that he may be open to the removal of some of the bank's unprecedented monetary stimulus, which has taken the form of negative interest rates and €60 billion of quantitative easing. That sparked a flurry of buying into the single currency, which jumped to a near 10-month high after the comments.

It extended those gains on Wednesday and has continued to do so on Thursday morning, despite ECB sources telling both Reuters and Bloomberg that the market has misinterpreted Draghi's comments and overreacted to them.

Regardless, the euro is up 0.31% as of 10.50 a.m. BST (5.50 a.m. ET) to trade at €1.1413 against the dollar:

Screen Shot 2017 06 29 at 10.52.08

It is a similar story in the UK, with the pound rallying strongly after comments by Carney that were seen as hawkish.

"Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional," Britain's most senior monetary policymaker said while speaking on a panel at the European Central Bank's Forum on Central Banking in Sintra, Portugal.

As recently as last week, Carney said that he was not ready to vote for a rate hike. He is one of the more dovish members of the bank's Monetary Policy Committee. But on Wednesday he sought to clarify his position, effectively saying that he would be ready to vote for a rise in rates if business investment begins to rise, which should offset weaker consumption in the process.

Those comments pushed sterling more than 1% higher on Wednesday afternoon, with gains continuing into Thursday morning. The pound is close to 0.3% higher against the dollar, and a little earlier climbed above $1.30 for the first time since mid-May. It has since dropped below that mark.

Here is the chart:

Screen Shot 2017 06 29 at 10.47.54

Hussein Sayed, chief market strategist at FXTM, said in an emailed statement: "Both the ECB’s Mario Draghi and the BoE’s Mark Carney have now sent a message to investors from Sintra, Portugal, that the era of cheap money is close to an end. This time, the reaction was mainly felt in fixed income and currency markets."

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The 7 scariest challenges facing the British economy, according to analysts

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Union Jack man

LONDON — Once Britain recovered from the worst of the crippling damage done by the financial crisis, the economy started to tick along at a reasonable pace.

Since June 2016, however, when Britain voted to take itself out of the European Union, volatility and political intrigue have returned to the country's macroeconomic picture. 

Britain now faces a mountain of issues, many of which are tied to Brexit. Inflation is surging, consumer spending is slowing, productivity remains mired in pre-crisis growth levels, and uncertainty reigns supreme.

But which issue is the most important?

Business Insider asked strategists, analysts and economists from banks, asset managers, and research houses to tell us what they believe is the single biggest issue facing the British economy.

We have rounded up a handful of the most interesting responses, including charts to illustrate the arguments made by those respondents.

Check them out below:

Inflation — Daniel Morris, Senior Investment Strategist, BNP Paribas Asset Management

What's going on:Inflation has jumped to its highest level since 2013 in the year following the Brexit vote as the pound plunged in value against the dollar. While it saw a surprise fall from 2.9% to 2.6% in June, the level of price growth for everyday goods and services remains worryingly high, and well above the Bank of England's 2% target.

Their view: "Inflation is probably the biggest challenge currently facing the UK economy.  The depreciation of sterling is raising import prices and therefore diminishing consumer purchasing power, while at the same time wage growth is slowing down.  This weakness in consumer demand, combined with the anticipated slowdown in business investment during the Brexit negotiation period, means that it will be difficult for the UK economy to maintain the level of growth it experienced during 2016."



The British consumer — James Knightley, Chief International Economist at ING

What's going on: One of the knock-on impacts of inflation's surge in the last year is that British consumers are feeling the squeeze as prices rise, but wages do not. In the second quarter of this year, Visa's widely watched index of consumer spending recorded the weakest quarter for expenditure since Q3 2013.

Their view: "My immediate worry is for the UK consumer. The squeeze on spending power from weak wage growth and rising prices has led households to borrow more through credit cards and personal loans. Now the Bank of England is trying to clamp down on this for reasons of financial stability it is difficult to see how households can maintain their current levels of spending."



The Bank of England's interest rate dilemma — Laith Khalaf, Senior Analyst at Hargreaves Lansdown

What's going on: Brexit has speared the Bank of England's Monetary Policy Committee on the horns of a dilemma.

The central bank must balance growing inflation – which usually calls for an interest rate hike – with the slowdown in the economy and dwindling consumer spending, which requires rates to fall.

Their view: "Dealing with Brexit is going to be a long drawn out process, but if I had to choose one immediate issue it would be the challenge facing monetary policy. On the one hand, consumer credit is rising sharply, and in order to tackle this, the Bank of England would like to raise rates just to show that they go up as well as down.

"After a decade of falling interest rates, 8 million Britons have now never seen an interest rate rise in their adult life. However economic growth is weak and looks to be slowing, and any rise in interest rates is likely to slow down consumer spending, which is a key driver of returns.

"So the Bank of England is left walking a tightrope between trying to put a cap on unsecured borrowing which stores up problems for the future and keeping the economy ticking over in the here and now."



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DEUTSCHE BANK: Here's how Brexit fundamentally changed the way in which the pound is traded

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Pound union jack

LONDON — When Brits decided to leave the European Union last June, the most obvious impact of the vote was the sudden, sharp drop in the value of the pound.

The day after the referendum, Sterling dropped more than 10%, suffering the biggest single-day fall for a major currency since the Second World War, and hitting a low against the dollar that had not been seen in 31 years.

Sterling dropped from being worth close to 1.48 against the dollar to around $1.32, and also plummeted against the euro, costing forex traders millions and making the average Brit's trips abroad a whole lot more expensive.

The referendum, however, had another — lesser noticed — impact on the pound. It has shifted how traders around the world trade the currency.

That's according to Deutsche Bank macro strategist Oliver Harvey and his colleague Rohini Grover, who discussed this change in their daily FX note, circulated to clients on Tuesday.

"Investment biases in different FX time-zones ... changed markedly after last year’s referendum," the pair wrote.

The first major change occurred in the few months that followed immediately after the referendum when Asian traders and those working early in the morning in Europe turned marginally more positive on the currency than in the past, with trade getting less bullish as the day progressed.

Here are Harvey and Grover:

"Historically, GBP/USD used to weaken during the Asia and London morning but strengthen during the common London-NY and NY afternoon sessions (Fig 1). In the aftermath of Brexit, however, Asia and the London morning turned slightly bullish, while the combined London/NY session, representing peak liquidity, saw systematic selling of the pound (Fig 2).

"This may be due to Asian investors regarding sterling as a value proposition after its initial sell-off, while domestic or European investors were significantly more pessimistic on the Brexit outlook."

And here are the charts:

Screen Shot 2017 08 01 at 10.15.44

The next major change, Harvey and Grover note, came after Theresa May delivered her now infamous Conservative Party conference speech in which she moved towards a harder Brexit stance.

"Asian investors appeared to revise their view, and the Asian and London morning sessions saw selling pressure resume," the pair note.

The next big shift came after May delivered her Brexit vision in a speech in January. During that speech, May all but confirmed a "Hard Brexit" by saying that Britain would leave the European Single Market.

"At that point, it seems like more investors active at this time saw all the bad news priced. Asian investors were less impressed and remained bearish," Deutsche's analysts write.

"Interestingly, there has been little change to the persistent pattern of buying during the NY afternoon through this whole period."

Here is that chart:

Screen Shot 2017 08 01 at 10.32.38

Since June's shock election result — which sent the pound sharply lower— caused less of a split between traders, with a "broader based agreement among global investors."

"Sentiment in both the Asia, joint London/NY and the NY afternoon has been bullish, perhaps reflecting optimism in a softer Brexit, although general dollar weakness may be another factor," Harvey and Grover write."

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Consumer spending is having its biggest slump in 4 years, as Brits spend less on clothes and holidays

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Shoppers browse stalls in St Nicholas Market on January 26, 2017 in Bristol, England. Figures released for 2016 show that Bristol had the UK's fastest-growing economy outside of London and its house prices are the fastest-growing in the country. According to the Hometrack UK Cities House Price Index, property rose by 9.6 per cent in Bristol in 2016. (Photo by )

LONDON — UK consumer spending fell for the third month in a row in July, according to a survey by card giant Visa.

Visa's Consumer Spending Index found a 0.8% fall in consumer spending last month, when compared to July 2015. It follows similar declines in May and June.

While it might not sound like a significant fall, a prolonged slump like this has not been seen since February 2013, when spending fell for five straight months.

Kevin Jenkins, UK & Ireland Managing Director at Visa, says in a release: "The figure provides further evidence that rising prices and stagnant wage growth are squeezing consumers’ pockets."Visa Consumer Spending Index JulyInflation is currently at 2.6% and expected to peak at around 3% later this year. Prices are being driven higher by last year's collapse in the value of the pound post-Brexit, which makes imported goods more expensive.

Wages are growing by just 2%, meaning consumers have to absorb a real price rise of 0.6%. That means spending less, dipping into savings (which are already depleted), or borrowing.

Annabel Fiddes, a principal economist at IHS Markit, the data company that helped Visa put the figures together, said in a statement: "Reduced spending comes at a time when the UK economy has been expanding at a relatively modest pace, while households have been facing strong increases in living costs, and a slowdown in earnings growth. Notably, the latest ONS figures show total real pay falling at the quickest pace for nearly three years."

"Alongside the renewed squeeze on household budgets, uncertainties linger over the direction of the economy and the outcome of the ongoing Brexit negotiations, which is weighing down consumer confidence. All this makes it seem unlikely that consumer spending will recover in the current challenging conditions, and adds to expectations that the Bank of England will not hike rates anytime soon." (You can read more on the dilemma facing the Bank of England here.)

Visa's data looks at all money spent on its debit, credit, and pre-paid cards to get an idea of how consumers are spending across the UK. Roughly a third of all money spent in the UK uses some form of Visa card and the company adjusts its figures to ensure they represent the wider spending landscape.

Visa found a particularly big slowdown in the transportation sector, as Brits favoured staycations over going abroad, and in the clothing sector. Transport and communication spending was 6.1% lower than a year earlier, while spending on clothing and footwear fell by 5.2%.

UBS warned in April that it was seeing a "dramatic reduction in consumer discretionary income and intention to spend," and forecast that the clothing sector would be worst hit.

Visa's Jenkins said in the release: "There were still some bright spots in July, with hotels, restaurants and bars reporting a 6% increase. The sector is likely to have benefited from an early surge in summer staycations, as the weak pound made holidaying at home more attractive."

The shift of retail online also continues. Face-to-face spending fell by 3.7% in July, while online sales rose by 3.6%.

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MORGAN STANLEY: The euro will be worth more than the pound by next year

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Pound Euro

  • Morgan Stanley says Sterling will sink below €1 by next year.
  • Surging Eurozone economy will buoy currency.
  • Brexit uncertainty to weaken pound.

LONDON — The euro will be worth more than Britain's currency by the end of the first quarter of 2018, analysts from Morgan Stanley said in a client note circulated on Friday.

In the bank's latest FX Overview paper, a team led by strategist Hans W. Redeker argue that a combination of a stronger euro and a weakening pound will combine to make the euro more valuable than the pound for the first time in its history, and make it — in terms of pure value — the strongest major currency on the planet.

The euro has been on a huge tear during 2017, particularly against the dollar, as investors take note of the improving fortunes of the bloc's economy, which has seen growth recover to its best levels since the eurozone debt crisis.

It will continue to strengthen and will move "beyond parity" with the pound during the first three months of the year, hitting a peak of £1.02 before weakening a little as the year progresses, the team's latest forecasts suggest.

By the end of 2018, €1 will be worth £0.91.

On the one hand, Morgan Stanley argues, the euro's historic move beyond parity with the pound will be driven by continually increasing confidence in the eurozone economy, which will prompt major currency buyers to add a greater allocation of the euro to their portfolios.

"We expect EUR to stay strong as pension funds and insurance companies (such as those in Switzerland and Japan) start to increase their net EUR currency exposure from historically low levels," the team writes.

However, what will also drive the move is the weakness currently apparent in the British economy and the uncertainty surrounding Brexit negotiations, both of which will drive down the value of the pound.

"GBP is likely to weaken in its own right, driven by weak economic performance, low real yields and increasing political risks," the team writes.

"Last year, the British economy maintained its growth momentum even after the Brexit vote, but the structure of growth has changed. The household sector has increased spending, primarily funded by unsecured lending, which is unsustainable (Exhibit 11).

"A consolidation of the household balance sheet, coupled with negative real wage growth, may reduce consumption, which has been propping up growth so far (Exhibit 12). Brexit uncertainty may also weigh on business investment, which will weaken the already lackluster productivity growth outlook, suggesting real rates staying low."

Here are both exhibit's mentioned by the researchers:

Screen Shot 2017 08 11 at 15.12.41

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DEUTSCHE BANK: Expect UK stocks to jump as 2017 continues

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British flag

LONDON — British stocks remain attractive and will continue to rise as 2017 draws to a close, regardless of Brexit worries, according to equity analysts at Deutsche Bank.

In the note, Deutsche analysts Wolf von Rotberg, Sebastian Raedler, Thomas Pearce, and Andreas Bruckner said they are overweight British stocks — essentially meaning they believe UK markets are good value for money — and that they see the benchmark index, the FTSE 100 rising further in 2017.

In December last year and January this, the FTSE 100 went on a streak of more than 10 days of consecutive new highs, surging as the pound weakened, triggered by Britain's vote to leave the European Union. It has held onto those highs for most of the year, and is currently trading at around 7,350 points, roughly 200 points or 2.6% below its record.

More upside remains for the FTSE 100 this year, von Rotberg and team argue, thanks to the continued weakness of the pound, as well as fading momentum in the eurozone and strength in the energy sector.

Here are the bank's four key ideas:

  • "UK equities have underperformed the market by 3% since the beginning of the year. Yet, the UK remains our largest overweight, given that: a) it tends to outperform in periods of fading Euro area PMI momentum – and we expect PMI momentum to turn negative over the coming months;
  • "b) our FX strategists project moderate downside for the GBP trade-weighted index by year-end, which tends to benefit the UK’s relative performance;
  • "c) its relative performance moves in line with that of the energy sector, one of our sector overweights;
  • "d) the UK ranks as the cheapest market on our European valuation scorecard."

And here is the bank's chart:

Screen Shot 2017 08 14 at 10.55.47

The basic premise of Deutsche's argument is that when the pound falls, that makes exports from Britain more attractive to foreign buyers. The FTSE is heavily reliant on companies which exporting goods for much of their business, and as a result, the falling pound is likely to keep supporting stock prices.

Though a weaker pound might seem like bad news for UK stocks, about 70% of the revenue of the companies that make up the FTSE 100 is derived from abroad, meaning they make more money when sterling is weak. The index is full of mining companies, oil firms, and pharmaceutical giants that use the UK as a base but tend to denominate their assets in dollars.

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NOMURA: Sterling is stuck as long as 'the UK continues to negotiate with itself' during Brexit talks

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David Davis Michel Barnier

LONDON — The pound will remain weak until the UK stops negotiating "with itself" and begins a "meaningful dialogue" with the European Union, according to analysts at Japanese banking giant Nomura.

Nomura's Jordan Rochester said that, in months gone by, news of the UK's Brexit position – which is to leave the customs union but seek to negotiate a totally "new" customs relationship which is as "frictionless" as possible — would have seen Sterling rise against other currencies.

But that did not happen, and as of around 8.30 a.m. BST, sterling is little moved, dropping around 0.2% against the dollar to trade at $1.2940, as the chart below illustrates:

Screen Shot 2017 08 15 at 08.46.12

Here's Rochester on the reasons for that lack of a rally (emphasis ours):

"The reason why GBP may not have rallied is we have to remember a) the majority of the UK exports are in services which this does not address and that b) that for the most part, the UK continues to negotiate with itself rather than any meaningful dialogue with the EU thus far.

"The EU have consistently said that no future talks would start until the exit arrangements are made clearer. Something that he is also reported to suggest could be delayed past the soft deadline of October if the current pace of negotiations continues as they are."

Instead, Sterling's movements are currently much more reliant on economic data and how markets perceive it.

"The past few months have seen post-Brexit data euphoria reverse course, and the declining negative real wage consumption squeeze is now taking hold," Rochester wrote on Monday.

"Market economists have been expecting this impact from the result of the referendum for over a year now, and the path of data surprises so far vindicates their view. Inflation is mostly owing to currency moves rather than a growing underlying demand, growth is faltering," he added.

Nomura's analysis of sterling comes just a few days after analysts at Morgan Stanley forecast that the euro will be worth more than Britain's currency by the end of the first quarter of 2018.

In the bank's FX Overview paper at the end of last week, a team led by strategist Hans W. Redeker said that a combination of a stronger euro and a weakening pound will combine to make the euro more valuable than the pound for the first time in its history, and make it — in terms of pure value — the strongest major currency on the planet.

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Summer holiday nightmare: The pound is at a 7-year low against the euro

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LONDON — British holidaymakers jetting off to Europe who haven't yet changed their money face misery, with the pound at a seven year low against the euro.

The pound dropped to its lowest level since 2010 on Wednesday — excluding a very brief period during last October's flash crash— as the strengthening single currency punishes the pound.

The euro/pound currency cross, which is generally how the two are measured against one another, briefly rose to £0.9141 during early trade on Wednesday. That marked the strongest the euro has been against the pound, bar the flash crash, since 2010.

That rally was quashed by the worst of the Eurozone debt crisis, which pushed the euro downwards.

The euro's recent rise against sterling illustrates the diverging economic fortunes of Britain and the eurozone since the Brexit vote. While the single currency area prospers — growth in Q2 exceeded expectations and ran at an annualised rate of 2.2% — the UK's currency is weak, growth is subdued and virtually all risks to the economic outlook are to the downside.

Here's the chart of the euro's rise:Screen Shot 2017 08 16 at 09.01.04

Having hit that record low in early trade, sterling has recovered a little after the latest data from the Office for National Statistics showed that UK unemployment fell to its lowest level since 1975 at the last reading.

The euro has been on a tear against both the pound and the dollar so far in 2017, as investors take note of the improving fortunes of the bloc's economy. EU growth has recovered to its best levels since the eurozone debt crisis.

Meanwhile, the pound remains subdued thanks to British economic weakness and the uncertainty surrounding Brexit negotiations, both of which are expected to continue to negatively impact sterling.

Late last week analysts at Morgan Stanley forecast that the euro will be worth more than Britain's currency by the end of the first quarter of 2018.

In the bank's FX Overview paper at the end of last week, a team led by strategist Hans W. Redeker said that a combination of a stronger euro and a weakening pound will combine to make the euro more valuable than the pound for the first time in its history, and make it — in terms of pure value — the strongest major currency on the planet.

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UBS: The pound is 'extremely undervalued'

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Money changer

LONDON — The pound is looking "extremely undervalued" against the euro, economists at UBS Wealth Management said.

Writing to clients on Wednesday, Dean Turner said that if investors were to look beyond the noise created by Brexit talks they would see that there is value in the UK's downtrodden currency.

The pound dropped to its lowest level since 2010 on Wednesday —excluding a very brief period during last October's flash crash — as the strengthening single currency continued to punish the pound, reflecting the diverging economic fortunes of Britain and the eurozone since the Brexit vote.

While the single currency area prospers — growth in Q2 exceeded expectations and ran at an annualised rate of 2.2% — the UK's currency is weak, growth is subdued and many see all risks to the economy as being to the downside.

Turner said there are reasons to believe that the pound could be on its way up in the near future, and that it really should be worth more.

"I am often asked how much further the pound can fall," he said.

"'Don’t fight the tape' is a phrase that springs to mind. Nonetheless, sterling looks extremely undervalued on most measures. Brexit will change the UK’s current trade relationship with the EU, but everything has its price."

"Indicators for the manufacturing sector show that the weaker currency is boosting export demand. It should also make the UK a relatively attractive place for foreign companies to invest. Political noise ebbs and flows and, with it, exchange rates."

Turner's view contrasts with that of Morgan Stanley's Hans W Redeker, who wrote in a briefing last week that he and his team expect the pound and the euro to move beyond parity— meaning that €1 is worth more than £1 for the first time ever — next year.

On the one hand, Morgan Stanley argued, the euro's historic move beyond parity with the pound will be driven by continually increasing confidence in the eurozone economy, which will prompt major currency buyers to add a greater allocation of the euro to their portfolios.

However, what will also drive the move is the weakness currently apparent in the British economy and the uncertainty surrounding Brexit negotiations, both of which will drive down the value of the pound.

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The pound won't hit parity with the euro even if the Tory government collapses

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  • The euro will not hit parity with the pound, Pantheon Macroeconomics forecasts.
  • Eurozone growth prospects, which have driven the currency higher, are overblown.
  • The UK government's likely move toward a more conciliatory Brexit stance will strengthen the pound.

LONDON — The pound will not drop to parity with the euro, regardless of the political solution in the UK, because prospects for growth of the eurozone economy have been exaggerated, according to the latest research from Pantheon Macroeconomics.

Writing in a note circulated to clients on Tuesday morning, Pantheon's Chief UK Economist Samuel Tombs said there is "excessive optimism about the Eurozone's growth outlook." 

The euro has been on a huge tear during 2017, particularly against the dollar, as investors take note of the improving fortunes of the bloc's economy, which has seen growth recover to its best levels since the eurozone debt crisis. On the flipside, as Tombs notes, the pound has dropped sharply against the single currency in recent months, hitting lows not seen since 2010.

"The main driver of the depreciation," Tombs writes "has been a huge shift in sentiment in favour of the Eurozone, as the region's recovery finally has gathered pace. Eurozone GDP rose by 0.5% and 0.6% quarter on-quarter in Q1 and Q2, respectively, virtually guaranteeing that year-over-year growth will exceed 2% this year for the first time since 2010.

This won't last, Tombs and his eurozone-focused colleague Claus Vistesen said because of the region's weak productivity and demographic issues.

"Trend growth in the Eurozone probably now is only just above 1%, due to its poor demographics and weak productivity growth. Hopes that long-overdue structural reforms required to raise trend growth will soon be implemented, because centrists parties have prevailed in elections this year, probably have gone too far."

While the eurozone's strengthening will come to a halt, Pantheon also made the argument that the pound has likely seen the worst of its drop as the government is likely to continue towards a more concilliatory Brexit stance.

People are now more concerned about the economic realities of Brexit than they are about immigration, something which Tombs believes will allow Prime Minister Theresa May and her government to soften.

Here's the chart:

Pantheon immigration vs economics

One factor that has been cited as a possible driver for further sterling weakness is the collapse of Theresa May's incredibly weak government. May's slender parliamentary majority means only a handful of hardline Brexiteers would need to rebel against her on any given issue to cause a disastrous government collapse.

That would likely see Jeremy Corbyn's Labour Party to sweep into government, a scenario that many suggested prior to June's shock election result could crash the pound again. Tombs disagrees, noting that "Labour has taken a 'softer' stance on Brexit than the Conservatives and the looser fiscal stance it proposes would strengthen the case for raising interest rates."

Therefore, Tombs argues, the most likely outcome going forward is not euro-pound parity as analysts from the likes of Morgan Stanley have forecast, but rather a strengthening of the pound.

"Accordingly, we think that sterling still stands to make up some lost ground against the euro over the medium term. We see it recovering to about €1.23 by the end of 2018 and €1.27 by the end of 2019," he concludes.

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The pound just hit a one-year high against the dollar

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LONDON — The pound has climbed to its highest level in a year against the dollar on Tuesday morning after inflation data from the Office for National Statistics came in above expectations.

The UK's Consumer Prices Index (CPI) inflation rate — the key measure of inflation — was 2.9% in August, up from 2.6% in the previous month, according to the Office for National Statistics.

Inflation had been expected to climb to 2.8% from the 2.6% level seen in both June and July, according to economists polled before the release. Instead, it hit its joint highest level since the Brexit vote last summer.

The pound took off on the back of the news, climbing around 0.8% to trade against the greenback at $1.3275, a level not seen since September 2016 before the so-called October flash crash wiped several percent off the pound's value.

The chart below shows the pound's performance on Tuesday, as of 12.00 p.m. BST (7.00 a.m. ET):

Screen Shot 2017 09 12 at 12.01.22

"GBP/USD reached its highest level in a year earlier, although it has backed away from earlier highs," Kathleen Brooks, head of research at CityIndex said in an email.

"In fairness, if the pound can’t rally when the dollar is this weak then something would be amiss. At this stage, cable moves are as much about USD weakness rather than UK inflation."

The pound is set to come into sharp focus this week ahead of the Bank of England's September Monetary Policy Committee meeting on Thursday. With inflation rising, the bank faces a policy trade off. The bank must balance surging inflation brought on by the weakened pound since the referendum with the slowdown in the economy, dwindling consumer spending, and declining inward investment.

So far, the dwindling economy side of the argument has largely held sway on the MPC, with the closest vote held since the Brexit seeing three members of the committee backing an increase in rates back to 0.5%, and five voting to leave rates unchanged.

The latest inflation figures, as well as communications from the bank, suggest that a rate hike may be on its way sooner than expected.

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The pound is now higher than at any point since the Brexit vote

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LONDON — The pound continues to climb on Friday and has reached its highest level against the dollar since last summer's Brexit referendum after the Bank of England's Gertjan Vlieghe — probably its most dovish policymaker — said a rate hike could come in "months."

Speaking at the annual conference of the Society of Business Economists, Vlieghe said that if the current "data trends of reducing slack, rising pay pressure, strengthening household spending and robust global growth" continue as they are, the bank could raise rates in the short term.

The pound had already rallied on Friday morning, but Vlieghe's comments gave sterling even further impetus, and by 10.30 a.m. BST (5.30 a.m. ET) the currency is up by more than 1.1% to trade at 1.3550 against the dollar, as the chart shows:

pound sept 15 2

On Thursday, Britain's central bank kept rates at a record-low 0.25% but strongly signalled that markets are underestimating the potential for an increase in interest rates in the coming months.

The bank's Monetary Policy Committee said that "some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target." In central bank-ese, that's as pretty clear of a hint as it gets.

The pound took off on Thursday afternoon as a result, eventually ending the day 1.4% higher against the dollar.

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HSBC: 'We were wrong' to think the pound would stay weak in 2017

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  • Europe's largest bank by assets reverses direction on the pound and admits being wrong about sterling in 2017.
  • The bank argues that rather than being driven by Brexit developments as expected, cyclical factors have been more important.
  • Rising expectations of a Bank of England rate hike have helped push the pound higher.
  • HSBC had forecast that sterling would fall as low as $1.20. It now believes the pound will end the year at $1.35.

LONDON — "We were wrong."

That is HSBC's blunt, unusually contrite assessment of its call earlier this year that the pound would fall as low as 1.20 against the dollar in 2017, driven down by Brexit uncertainties and the prospect of the UK failing to negotiate a good Brexit deal — or in fact, any Brexit deal.

"We expected 2017 to be a difficult year for GBP, one in which the currency would succumb to the uncertainties that the Brexit vote had unleashed and where politics would remain the dominant driver," HSBC's David Bloom and Daragh Maher wrote in a note circulated to clients on Monday.

"It was the year when a lack of progress in Brexit negotiations would cause a fretful GBP to ponder a 'no deal' cliff-edge conclusion to the Article 50 machinations. Heightened political uncertainty would in turn highlight the UK’s structural frailties. The current account deficit would remain stubbornly wide, encouraging additional GBP downside."

In short, none of that has happened. The pound is now trading at its highest level since the referendum, climbing above $1.35 last week, and gaining more than 10% on the greenback since the beginning of the year, as the chart below illustrates:

pound year to date 2017

Rather than trading on Brexit developments — as it did in second half of 2016 after the vote — the pound has behaved like a normal, cyclical currency, moving after things like data events and Bank of England announcements that have the ability to influence the next interest rate move from the central bank.

"This year GBP has slavishly and exclusively followed only cyclical drivers not the political ones," Bloom and Maher argue, citing the chart below:

Pound movements v rate expectations

Here's the bank's analysis (emphasis ours):

"Chart 1 shows GBP-USD plotted against expectations for 1Y rates a year ahead in the UK compared to those in the US. Prior to the Brexit vote in June 2016, the relationship was neat. During H2 16, the power of political drivers to disrupt this relationship is evident. Yet in 2017, GBP reverted to being a cyclical slave, once again tracking those rate expectations. It’s as though the market has a set and stable idea of the Brexit negotiations."

A perfect example of the pound's cyclical shift came on Friday last week when it gained more than 1% on the dollar after the Bank of England's Gertjan Vlieghe— probably its most dovish policymaker — said a rate hike could come in "months."

Speaking at the annual conference of the Society of Business Economists, Vlieghe said that if the current "data trends of reducing slack, rising pay pressure, strengthening household spending and robust global growth" continue as they are, the bank could raise rates in the short term.

Vlieghe's words were probably his most hawkish since he joined the bank's Monetary Policy Committee, and reinforced the bank's words from the previous day, in which it strongly signalled that markets are underestimating the potential for an increase in interest rates in the coming months.

The bank's Monetary Policy Committee said that "some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target." In central bank-ese, that was as clear of a hint as it gets.

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