GBP has come under fire at the start of the week on political developments but eyes are already focussed on the all-important inflation data out on Tuesday.
- GBP still on course to record a decent month’s recovery against both USD and EUR
- Pound to dollar exchange rate down half a percent at 1.4382 at start of new week
- Pound to euro exchange rate down 0.6% at 1.2768
Sterling has seen a poor start to the new week with much of the blame falling to developments on the political stage.
We agree with those who argue that the resignation of senior Conservative Iain Duncan Smith is irrelevant to the market.
Rather, if we are to look at politics, it is the observation that the polling data on the EU referendum remains incredibly tight.
The uncertainty posed by a UK exit remains in abundant supply as the gap between the leave and stay camps tightened over the weekend.
We do however expect damage to be limited as much of the premium surrounding Brexit is already absorbed into the exchange rate. Only significant developments on this front will shift the rate.
In fact, all being equal, we see no reason why the positive momentum of late cannot prompt sterling to end the month notably higher against the euro and dollar.
Inflation Data is Key Driver on Tuesday
What matters for the pound? With EU referendum risks expected to remain subdued the pound could find some direction from economic data releases.
We have inflation data out on Tuesday - this will certainly provide sterling with movement should it deviated notably from the levels forecast by analysts.
A poll of analysts shows consensus forecasts for annual inflation to rise to 0.4% in February from 0.3% in January.
The Bank of England surprised markets last week by confirming they expect interest rates to move higher as they see inflation rising over coming months.
If inflation data beats expectations we would imagine sterling will rise as it reinforces the view that inflation, and interest rates are headed in a sterling-supportive direction.
The GBP remains a slave to interest rate expectations as the hope of higher rates tends to stoke global investor demand for UK assets.
A side effect of this increased investor demand is a higher sterling.
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