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Inflation and unemployment in the UK influencing exchange rates
14 October 2014

Where is the UK headed this week? Well, to understand fully the repercussions of any data releases this week, we must first decipher what has come before.

The last few months has seen Euro inflation plummet significantly; the knock on effect ultimately being slowing growth right here in the UK – an indication of which can be seen in the form of the FTSE 100 dropping 1.4% last Friday, a 12 month low. Housing activity has slowed with mortgages more pricey and difficult to come by than in recent times under the governments house buy scheme – mortgages brokered dropped by fastest rate in 6 (SIX) years. Significantly even house prices in the Capital are said to have dropped for the first time in several years. These points then are the main reason why transferring your hard earned Pounds will get you slightly less currency, particularly Euros, as the rate has dropped two cents in the last two weeks – and that is MY 2 cents worth!

The impending May general election with potential for Euro-zone membership referendum is also playing havoc with corporate sentiment/business confidence. Surveys suggest a bearish outlook due to the upcoming political restructuring next Spring. This negativity has been exacerbated by reports from manufacturing firms that export growth has been the weakest in nearly 2 (TWO) years.

It is not all bad, of course. The upshot of all this is that for every down there is an up and the silver lining for the UK comes in many forms – lower commodity prices in countries such as Brazil and Russia together with an overall strong Pound Sterling have led to petrol prices dropping five pence to 126.8 – a four year low. Food prices, also, have dropped by 1.0% over the past year; always a bonus for when there are more mouths to feed.

TODAY inflation data for Great Britain will almost certainly show an indication of a 5 (FIVE) year low in September – the effect of this is likely to show an increase in consumer spending here in the UK – just in time for Christmas!

A poor UK housing market coupled with a weak(ening) single currency on mainland Europe will certainly ease the pressure on Mark Carney to increase interest rates at least for the foreseeable. a delay in interest rises is likely to make the Pound suffer, leading to worse exchange rates for international payments.

We may well have our cousins from across the pond to thank for further upturn as their own, significantly improved from earlier in the year, economy is also probable to support UK activity, in which, the developments recently will dictate interest rates will stay lower for a longer time – inflation will continue to drop. As interest rates and inflation are inherently joined, these two things are the two big factors in GDP growth.

Of course, the largest influence on any economy, arguably is “the workforce” – the labour market. Employment data, specifically earnings, to be released TOMORROW, could significantly improve exchange rates and more importantly, strengthen the Pound. Last month’s increase of 0.7% could well be seen to have improved further...hopefully! Unemployment is also expected to have decreased from 6.2% to 6.1%

So all in all – some good, some bad and hopefully not too much ugly!

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