Amongst a number of weaknesses such as a huge current account deficit the UK also has an inflation problem, which will eventually take its toll on GBP. For the time being at least a robust real estate market and recovering economy will be strongly supportive of Sterling. The UK has long had an inflation prone economy. Today is no different. Consider the UK has an inflation rate of 2.7%. That’s low by historical standards, but very high compared with its trading partners. And relative is important. Because in the US it is 1.5%, the Eurozone 1.1% and Japan 0.8%. That means GBP is losing its purchasing power at a faster rate than most of its trading partners meaning that in the long run it is a negative for the UK currency. By Justin Pugsley, Markets Analyst MahiFX. Follow MahiFX on twitter Historically, wages have been a key driver of UK inflation. But not this time. They’re increasing by only 1% and in recent years have consistently lagged inflation. GBP weakness was a culprit, but not anymore. In 2008 it went off a cliff falling below 1.40 versus USD at one point, but for several years it has been in a relatively stable range of 1.50-1.60. GBP/USD faces stiff resistance at 1.6300 & 1.6500 Are oligopolies and services to blame? Identifying the key influences behind UK inflation is therefore challenging. Quantitative easing by the Bank of England may carry some blame – as a percentage of GDP it used this measure on bigger scale than the US for example, but then again UK M4 money supply is expanding at a relatively modest 2.1%. The big culprit appears to be the services sector where inflation is running at 3.4%. In a fairly weak economy that seems strange and suggests a lack of competition allowing services companies to pass on price rises. Part of that explanation could the oligopolistic nature of much of the UK economy. Some years back an executive at a major automotive manufacturer referred to the UK as “treasure island” on account of the wider profit margins achievable there relative to other countries. In the UK retail banking is completely dominated by four players, food retailing by four main supermarkets and domestic energy provision by six utility groups. All considered highly competitive industries, but may nonetheless find it easier to pass on price rises. Then there’s the real estate market. The highly congested, but economically dynamic south-east with its strict planning permission laws for new homes is prone to soaring house prices and rents. But all bullish for now… But for the time being at least none of this matters. GBP/USD could even reach 1.6500 or the lofty highs of 1.7000 before issues such as the current account deficit begin to make an impact on sentiment. Right now the ruling coalition party is busy priming the economy to help it win the general election due by May 7, 2015. Therefore measures are being taken to boost the all-important real estate market. Rising houses prices help induce a feel good factor. Other measures such as austerity and rebalancing the economy away from domestic consumption towards exports have quietly taken a back seat. Overall this is helping boost the rate of GDP growth and it is shifting UK monetary policy towards a tighter bias. Another factor is general USD weakness due to US domestic issues – all of which is supportive for GBP. Justin Pugsley Justin Pugsley MahiFX is headed by David Cooney, former global co-head of currency options and e-FX trading at Barclays Capital and responsible for the award winning e-commerce platform BARX and Susan Cooney, former head of e-FX Institutional Sales in Europe for Barclays Capital. Operating as a market maker, MahiFX provides traders direct access to institutional level execution speeds and spreads through its proprietary-built fully automated pricing and risk management technology, lowering the cost of retail forex trading. MahiFX global operations are headquartered in Christchurch, New Zealand with offices in London, UK with development and support teams in both locations for 24 hour service. The company is regulated by The Australian Securities and Investments Commission (ASIC), Australiaâ€™s corporate, markets and financial services regulator. Article by Justin Pugsley, Markets AnalystÂ MahiFXÂ Follow MahiFX onÂ twitterÂ and onÂ facebookÂ Disclaimer: This material is considered a public relations communication for general information purposes and does not contain, and should not be construed as containing, investment advice or an investment recommendation, or an offer of or solicitation for any transactions in financial instruments. MahiFX makes no representation and assumes no liability as to the accuracy or completeness of the information provided. The use of MahiFXâ€™s services must be based on your own research and advice, and no reliance should be placed on any information provided or comment made by any director, officer or employee of MahiFX. Any opinions expressed may be personal to the author, and may not reflect the opinions of MahiFX, and are subject to change without notice View All Post By Justin Pugsley Opinions share Read Next French PMIs disappoint, Spanish unemployment slides – EUR/USD holds Yohay Elam 9 years Amongst a number of weaknesses such as a huge current account deficit the UK also has an inflation problem, which will eventually take its toll on GBP. For the time being at least a robust real estate market and recovering economy will be strongly supportive of Sterling. The UK has long had an inflation prone economy. Today is no different. Consider the UK has an inflation rate of 2.7%. That's low by historical standards, but very high compared with its trading partners. And relative is important. Because in the US it is 1.5%, the Eurozone 1.1% and Japan 0.8%. That… Regulated Forex Brokers All Brokers Sponsored Brokers Broker Benefits Min Deposit Score Visit Broker 1 $100T&Cs Apply 0% Commission and No stamp DutyRegulated by US,UK & International StockCopy Successfull Traders 9.8 Visit Site FreeBets Reviews$100Your capital is at risk.2 T&Cs Apply 9.8 Visit Site FreeBets Reviews$100Your capital is at risk.3 Recommended Broker $100T&Cs Apply No deposit or withdrawal feesTrade major forex pairs such as EUR/USD with leverage up to 30:1 and tight spreads of 0.9 pips Low $100 minimum deposit to open a trading account 9 Visit Site FreeBets ReviewsYour capital is at risk.4 T&Cs Apply Visit Site FreeBets ReviewsYour capital is at risk.5 Recommended Broker $0T&Cs Apply Trade gold, silver, and platinum directly against major currenciesUp to 1:500 leverage for forex trading24/5 customer service by phone and email 9 Visit Site FreeBets ReviewsYour capital is at risk.