As the Brexit process rumbles interminably on, it can become tempting to presume that the traditional triggers for the rise and fall of the value of currencies have more or less fallen by the wayside. Time and again, a speech from Theresa May, a leak from the Department for Exiting the European Union or a comment made by Michel Barnier has caused the pound to shift dramatically, usually dropping further against the dollar and the euro. Since the referendum result in June 2016, it has seemed as though the economic drivers of currency fluctuation which have, in the past, been used by those relying on their ability to predict shifts ahead of time, have ceased to operate. Events of the past week or so, however, have outlined the fact that not everything has changed.
Despite the new landscape mapped out by the dramatic shift of Brexit, the release of figures relating to wage growth, employment and inflation still proved to be capable of impacting upon the strength of the pound. The fact that the figures in question then appeared to have an immediate and measurable effect upon the spending decisions being taken by people in the UK merely served to amplify their importance, particularly to anyone who has been expecting a rise in interest rates early in November.
The first of these figures, the figure for unemployment, is the one which, according to conventional wisdom, denotes the kind of healthy and robust economic performance which would normally send the pound higher. UK Employment levels of 4.3% are the lowest recorded since 1975, but it is the fact that wage levels, despite high employment, are failing to keep pace with inflation which makes a rise in interest rates – seen as advantageous to the strength of the pound – highly unlikely.
The recent announcement that inflation is currently running at 3% whilst wages continue to stagnate demonstrated the degree to which the UK economy has slipped out of the conventional economic patterns. High employment would, in the past, have led to wage growth, as people took advantage of the fact that it was an ‘employees market’. This may in turn have spurred inflation to rise higher, something which an independent Bank of England would attempt to tackle by raising interest rates. The fact that the current levels of employment aren’t spurring wage growth would tend to indicate, to put it crudely, that employment isn’t what it used to be.
Low wage, less secure employment or low level self-employment have helped to create a position in which people are more likely to be keeping hold of the money they earn, an assumption which was borne out when retail sales figures for September revealed a drop of 0.8%. This, in itself, led to a drop in the pound, but the fact that it limits the options for a rise in interest rates – from 0.25% to 0.5% -means that the rally such a rise would prompt in the strength of the pound is unlikely to take place.
The events of the past few weeks caused the pound to slip slightly against the euro, something which demonstrated two things. The first of these was that the ‘standard’ economic announcements – inflation, employment, interest rates, GDP etc. – still have the power to impact upon the currency. The second factor being demonstrated was that these fundamentals have to be viewed in the context of Brexit, which exerts a gravitational pull capable of shaping all other events in its’ image. The collapse in the pound which took place immediately following the June 2016 referendum is one of the things which is fuelling inflation, and it is this inflation and the impact it is having on retail spending (when taken together with low wages) which makes a rise in interest rates, and the positive effect this would have on the strength of the pound, less likely to emerge. Solving this dilemma, and pushing the pound higher, is the kind of circle squaring which anyone involved with negotiating or planning for Brexit is only too likely to be familiar with.