Inflation Hurts UK Economy, but Sterling to Appreciate as Interest Rates go Higher
Pound Sterling Forex Playbook for June -CPI update
DERBYSHIRE GB / June 21st, 2023 - Updated outlook after the UK CPI reading remains at 8.7%, far higher than expected. Next update after the Bank of England policy meeting on Thursday the 22nd of June, or before if any significant event occurs.
This is the Pound Sterling Forex Playbook and is intended to be used as a guide to aid in your trade planning.
Macroeconomic Snapshot
The macroeconomics situation of the United Kingdom is mostly indifferent but is likely to improve. This is expected to reduce downward pressure on the Pound’s value.
May Meeting of the Bank of England’s, Monetary Policy Committee (MPC)
The Bank Rate was hiked by 0.25% in May to 4.50%, matching the 0.25% hike in March
The next meeting is on Thursday the 22nd of June
The hiking cycle has risen as anticipated and is expected to rise a little further. This is likely to lead to higher gilt bond yields which could increase their appeal to investors. This is expected to apply upward support on the pound's value.
GDP Growth Rate for Q1 2023, Preliminary Estimate
GDP in the UK for Q1 remained steady at a 0.1% quarterly expansion since Q4 2022
The final Q1 report is due on Friday the 30th of June
The economy has grown as anticipated but is expected to grow a bit faster. This is likely to lead to increased stock market prices and a shift in investor preference away from safer assets, such as government bonds. This is expected to apply upward support on the pound’s value.
CPI Report for May
CPI in the UK for May remained at 8.7% annual inflation from 8.7% in April
The June report is due on Wednesday the 19th of July
CPI has not fallen as anticipated although is expected to over the longer term. This is likely to cause higher interest rates and a shift in investor preference towards safer assets, such as government bonds. This is expected to apply upward support on the pound’s value.
Labour Report for April
Unemployment in the UK for April fell slightly to 3.8% from 3.9% in March
The May report is due on Tuesday the 11th of July
The labour market has improved better than anticipated but is expected to slightly deteriorate. This is likely to lead to slightly reduced growth and a shift in investor preference towards safer assets, such as government bonds. This is expected to apply indifferent support/pressure on the pound’s value.
Russian Invasion of Ukraine
The war is having a detrimental effect on the global and UK economy by causing higher energy prices, supply chain disruptions, financial market volatility, refugee crisis and geopolitical uncertainty. This is expected to apply downward pressure on the pound’s value.
Brexit
The UK's decision to leave the European Union (EU) has created a great deal of uncertainty about the future of the UK economy. This uncertainty has made investors less willing to take risks, which has led to a sell-off in risky assets, such as stocks and currencies. The resultant effects are expected to limit upward support on the pound’s value.
Cost of Living Crisis
The UK cost of living crisis is having a negative effect on the value of the pound. This is because investors are becoming less confident in the UK economy and are therefore less willing to invest in British assets. This is expected to apply downward pressure on the pound’s value.
GBP/USD Four Month View
The GBP/USD has risen in the past four months, supported by a weaker dollar. This was driven by investors moving into riskier assets as they reconsidered the hawkish moves by the Fed although there was a brief period in May when the dollar was bought as a safe-haven as the banking crisis deteriorated and the debt ceiling deadline was nearing.
GBP/USD Four Week View
The GBP/USD has risen in the past four weeks, supported by central bank disparity. The Fed's hiking cycle is ending, weakening the dollar, while sticky inflation may warrant a more aggressive BoE.
GBP/USD Outlook
The events to keep an eye on:
Monday the 19th of June
US National Holiday Juneteenth
Wednesday the 21st of June
UK CPI 8.7%, was expected to fall to 8.4 from 8.7
Fed Chair Powell Testifies historically neutral regarding rates
Thursday the 22nd of June
Bank of England Monetary Policy Meeting expected to hike by 0.25% to 4.75%
Bank of England Inflation Letter issued once every three months when CPI is above or below target
Fed Chair Powell Testifies historically neutral regarding rates
Friday the 23rd of June
UK Retail Sales expected to have shrunk by -0.2% from 0.5% growth
US Services, Manufacturing PMI’s
CME Group 30-Day Fed Fund futures
July: rising sentiment of a 0.25% hike, 80% in favour (prev. 75%)
September: holding sentiment of a hold, 70% in favour (15% for a 0.25% cut)
Short Term Value of the Pound Sterling to Appreciate, US Dollar to Stabilise: High inflation is hurting the spending power of consumers and deepening the cost of living crisis which is damaging economic growth. Moves are likely to remain above the recent rally from 1.26 as the Bank of England will need to raise and hold rates higher than previously expected.
Long Term Value of the Pound Sterling to Steadily Appreciate, US Dollar to Steadily Decline : As the long-term view is for an improvement in the UK economy, investors are likely to return. Moves are expected to remain above the recent rally from 1.22 unless the growth prospects turn sour.
Gavin Pearson
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Specialises in forex G7 currencies
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