In this week’s fundamental trading forecast for the British Pound, we used the phrase ‘Brexit permeation’ to signify how sentiment within the British economy as continued to erode as discussions around Article 50 have devolved deeper into a Parliamentary quagmire. The post-Brexit environment saw a brisk consumer-driven expansion of the British economy; but since December, we’ve seen a more-troubling theme of surprisingly disappointing data prints indicating that consumer strength has begun to wane.
Overnight, we received another piece of evidence from the British Retail Consortium that shows that British consumers may be getting more gun-shy: In February, like-for-like sales, excluding new store openings dropped by -.4%; well-beyond the expectation of -.2%. And this is on the heels of a disappointing print in January in which like-for-like sales dropped by -.6%. While these types of data prints can traditionally be noisy, the consecutive contractions combined with the eroding Services PMI gauge seen last week do not paint a pretty picture. As Brexit discussions have drug further-on with little by way of actual certainty, British consumers and investors appear to be responding with an increasing outlay of risk aversion.
Cited as a key reason for the drop in consumer spending was inflation and higher prices; and this has been the ‘elephant in the room’ for the British economy ever since the Brexit referendum. Before Brexit, Bank of England Governor, Mark Carney, warned that Brexit would cause a ‘sharp repricing’ in the value of the British Pound, which could then lead to higher rates of inflation, slower rates of growth and higher rates of unemployment. The ‘goto’ answer here would normally be to lower interest rates; but for the conundrum that the BoE found itself in, cutting interest rates further ran the risk of stoking even more inflation from an even sharper ‘repricing’ in the value of the British Pound.
