The British pound continues to trade sideways. In Wednesday’s North American trade, GBP/USD is trading at 1.3804, up 0.09% on the day. In economic news, there are no major British indicators. In the US, there was positive news on the manufacturing front. Capacity Utilization improved to 77.9%, beating the estimate of 77.3%. This marked the highest level since July 2014.
Inflation in the UK edged lower in December, dropping from 3.1% to 3.0%. Still, that is still much higher than the Bank of England target of 2 percent. The BoE finds itself in a tough spot with regard to interest rate policy. The Bank is reluctant to raise rates, especially with the uncertainties over Brexit, but high inflation continues to erode the purchasing power of the British consumer. A weak pound has further dampened consumer spending, although a cheaper pound has been a boon for the export sector. The BoE holds its next policy meeting in February, and as matters currently stand, the BoE is not expected to raise rates.
The financial sector in the UK is expected to take a hit when Britain departs the European Union, and many foreign banks with operations in London are looking at setting up shop on the continent. The Bank of England is trying to help, and in December, the Bank said that it would exempt European bank branches in London from costly capital rules after Brexit, if the EU co-operated with the BoE. On Tuesday, BoE Deputy Governor Sam Woods told a parliamentary committee that the BoE urgently need more clarity on Brexit. Woods stated that foreign banks in London would accelerate their move to the continent, if there is no Brexit transition deal in place by the end of March. This could be very tall order, as negotiations have not gone well between Britain and the EU.
