Inflation key to the falling value of Sterling
With inflation levels set to rise above the BoE's 2% target, they have stated that they will tolerate this, meaning interest rates are unlikely to be raised to try and combat rising prices. Low interest rates = weak currency. At the same time, wage growth is not expected to match inflation, meaning that real incomes are likely to drop. As this happens consumers are likely to spend less, weakening the economy and causing it to slow. Slowing economy = weaker Pound.
This is exactly what I expected would happen and warned of this on Monday and Tuesday. Yet again GBP/EUR rose to around €1.17/€1.18 before dropping back away. With Brexit negotiations set to begin next month, I think there is reason to believe the Pound will fall further in the short term. I also think that the BoE are overly optimistic in their revised growth forecasts. Just as their gloomy forecast for the economy in a post brexit world was wrong, I think they have gone too far the other way on this occasion. If indeed the economy does start to slow over the coming months, the Pound will fall further.
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