16.08.201910:21 Forex Analysis & Reviews: Sterling bounces for a while, but remains vulnerable

The UK economic data has provided the sterling with support this week as most major reports beat consensus forecasts.

Underlying average earnings strengthened to an 11-year high of 3.9% from 3.6% previously. The headline CPI inflation rate increased to 2.1% from 2.0% while retail sales also posted a monthly gain for July, stronger than expectations of a small decline.

The domestic data suggests that the Bank of England will need to be very cautious in easing monetary policy. The inflation and wages data would back the case for a small increase in interest rates.

Industrial sentiment remains depressed, but the Bank of England will hardly be able to sort it out through interest rates, especially with the sterling already very weak.

There is a strong likelihood that the Federal Reserve will cut interest rates again at the September meeting and that the ECB will announce an aggressive easing package next month. Given global monetary easing, net UK yields have, therefore improved.

Political factors will inevitably set the tone for the sterling given the underlying Brexit uncertainty. The government under Prime Minister Johnson remains committed to leaving the EU on October 31^st even if no deal with the EU can be reached.

A majority of the House of Commons members remain committed to avoiding any no-deal outcome with the scene set for an intense political battle from early September when parliament returns from recess.

The G7 Summit on August 24-26^th will provide clues to Brexit prospects as Boris Johnson is likely to meet key EU officials including German Chancellor Merkel. Overall political risk premiums will remain very high, although derivative markets indicate that underlying selling pressure on the sterling has eased slightly.