Forecast: NEUTRAL

For the first time in 10 years, the Bank of England raised interest rates. This was due inflation reaching 3.1%. The high inflation wasn’t so much due to a healthy economy producing positive data. It was more down to the depreciation of the GBP after Brexit. The GBP lost 20% of its value against other currencies which then caused import prices to rocket as UK business was having to pay 20% more for the same goods and services beforehand. This caused business to raise prices which caused rapid inflation. Within 12 months inflation grew from 0.7% to 2.9%.

The Bank of England plans to keep inflation at 2%. After the interest rate hike, the Bank of England said they will raise interest rates twice more by 2020. This will push interest rates up to 1% from 0.5% now. With UK unemployment at its lowest in 42 years (4.3%), it is only a matter of time before wages start to increase.

Despite a positive outlook on the UK economy, Brexit is the factor which the markets will watch the closest. If Brexit negotiations go well and the UK can remain in the single market, then the GBP should rally back to the levels it fell from after the Brexit referendum. However, due to the uncertainty around the Brexit negotiations, trades on the GBP will be very risky in 2018.

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