Pound Outlook Bearish as UK Economy Slows, Inflation Remains High
Pound Sterling Currency Report September
Derbyshire, UK – September 23, 2023 - This is the currency report for the Pound Sterling and is intended to be a reference aid for your own analysis and trade planning. This edition contains a refreshed format for readability and now includes retail sales data. The next update after the GDP report on Thursday, October 12th, or before if any significant event occurs.
Decisions to trade are made at your own monetary risk.
Pound Outlook Bearish as UK Economy Slows, Inflation Remains High
The Bank of England kept interest rates at 5.25% in September 2023, but said it is still committed to bringing inflation back to 2%. The UK economy is underperforming and has a gloomy outlook, with GDP growth expected to stagnate and unemployment expected to rise. Macroeconomic signals suggest a bearish outlook for the pound, as the economy slows and inflation remains high. Geopolitical events, such as the cost-of-living crisis and the war in Ukraine, are also adding uncertainty and putting downward pressure on the value of the pound.
In the near term, the outlook for the pound is bearish. The UK economy is slowing down and inflation is remaining high, both of which are negative for the pound. Additionally, geopolitical events such as the cost-of-living crisis and the war in Ukraine are adding uncertainty and putting downward pressure on the value of the pound.
Monetary Policy
Interest Rates Held to Avert Risk of Recession
The nine members of the Bank of England's Monetary Policy Committee (MPC) set monetary policy, including the bank rate (interest rate). The bank rate is the interest rate that banks pay to borrow money from the Bank of England overnight and is secured by Gilt bonds. This rate affects the interest that banks charge their borrowers.
The MPC meets to set monetary policy eight times a year, the latest was September 21st and the next is on November 2nd.
The interest rate of the UK was held at the September meeting after being hiked by 0.25% in August and throughout the previous twelve meetings. This indicates that the Bank of England is hawkish but have become cautious so as to avoid affecting growth. Trading Economics forecast 5.25% to be the peak rate and 2024 to see cuts of 0.75%.
Key points of the Bank of England's MPC September 2023 meeting:
Maintained the Bank Rate at 5.25%.
Reduce the stock of UK government bond purchases by £100 billion over the next twelve months.
Inflation is expected to fall significantly in the near term, services inflation to remain elevated.
Indications of persistent inflationary pressures and resilience in the economy to be monitored.
Monetary policy will need to be restrictive to meet the 2% inflation target.
Steps to bring inflation back to 2% will be balanced with economic growth risks.
The MPC is committed to returning inflation to the 2% target sustainably in the medium term. It will continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole.
Sources: The Bank of England, Trading Economics, FXStreet
The Economy is Underperforming Against Forecasts and has a Pessimistic Outlook
The Bank of England's Monetary Policy Committee (MPC) makes economic forecasts four times a year. The most recent was at their August meeting and they will be updated in November.
Annual GDP has a pessimistic outlook compared to the MPC’s forecast and may fall into a recession without action which is possibly why the MPC decided to hold rates in September.
Annual CPI has an optimistic outlook compared to the MPC’s forecast and is on track to come in below expectations although the September rate hold may have put that in jeopardy.
Unemployment has a pessimistic outlook compared to the MPC’s forecast and may climb a lot higher than expected.
The Bank Rate is on track to match the MPC forecast and is likely at the peak with cuts beginning to be priced in for 2024.
Macroeconomics Signals a Bearish Outlook for the Pound
Outlook for Growth Shows that the Shrinking Economy Could Turn Flat
The UK GDP monthly rate report measures the change in value of goods and services produced in the UK over a given month compared with the previous. The latest data covers the July period and was published on September 13th by the Office of National Statistics and the next version is out on October 12th.
The monthly rate of GDP in the UK has been falling quickly over the past four months, after being mostly neutral for the previous year. This indicates that the economy is slowing and may fall into a recession.
The July growth rate of -0.50% was far lower than June’s 0.50%, and caused the recent downtrend. However, the forecasting model predicts flat growth during September, which would be above the recent downtrend and suggests that a recession could be avoided. Trading Economics are more optimistic, with a forecast of 0.2%.
Sources: Office for National Statistics, Trading Economics, FXStreet
Outlook for Inflation Signals a Light Tailwind for Growth
The UK inflation rate report measures the change in value of a basket of goods and services in the UK over a given month compared with the previous. The latest data covers the August period and was published on September 20th by the Office of National Statistics and the next version is out on October 18th.
UK prices have been rising more slowly over the past four months, after rising rapidly for the previous year. This suggests that the economy is slowing down, as demand falls and businesses compete for fewer customers. However, it could also be a sign that supply chains are improving.
August's inflation rate of 6.7% was only slightly lower than July's 6.8%, but it did continue the recent downtrend. However, the forecasting model predicts inflation of 5.64% for September, which would pull prices below the recent downtrend and steepen it, suggesting that the rate of inflation is slowing. Trading Economics is less optimistic, with a forecast of 6.5%.
Sources: Office for National Statistics, Trading Economics, FXStreet
Outlook for Retail Sales Signals a Light Headwind to Growth
The UK retail sales report measures the change in value of aggregated retail goods and services sales over a given month compared with the previous. The latest data covers the August period and was published on September 22nd by the Office of National Statistics and the next version is out on October 20th.
UK sales have declined steadily over the past four months, reversing the gradual improvements seen over the previous year. This is a sign of a slowing economy, as consumers tighten their belts amid the cost of living crisis and rising interest rates.
However, August sales (0.4%) showed a significant improvement over July (-1.10%) and beat the recent downtrend. The forecasting model predicts sales of 0.0% for September, which would also be above the recent downtrend although still reflective of a slowdown. Trading Economics are more optimistic with their forecast of 0.3%.
Sources: Office for National Statistics, Trading Economics, FXStreet
Outlook for Unemployment Signals a Light Headwind to Growth
The UK unemployment rate report measures the number of people actively looking for a job as a percentage of the labour force in the UK over a given month. The latest data covers the July period and was published on September 12th by the Office of National Statistics and the next version is out on October 17th.
UK unemployment has been rising slowly over the past four months, reversing the gradual decline seen over the previous year. This is a sign of a slowing economy, as businesses invest less due to falling demand.
July’s unemployment of 4.3% was only slightly higher than June’s 4.2% and came just under the recent uptrend. The trend following forecasting model predicts unemployment at 4.1% for September which would be an improvement below the recent uptrend and flatten it. Trading Economics are more realistic with their forecast of a small increase to 4.4%.
Sources: Office for National Statistics, Trading Economics, FXStreet
Geopolitical Events Influence a Bearish Outlook for the Pound
Cost-of-Living Crisis Pressures Consumers Spending Power
Since late 2021, the prices for many essential goods in the United Kingdom have been increasing faster than household incomes, resulting in a fall in real incomes. This is caused by a combination of factors, including rising inflation, the COVID-19 pandemic, the Russia-Ukraine war, and Brexit.
Recent Key Events
April-May 2022: 77% of UK adults report feeling worried about the rising cost of living, and 50% say they worry "nearly every day". 52% of respondents to an ONS survey say they have cut back on their energy use.
June 2022: Inflation rises sharply, affecting a wide range of goods and services, including transport, food, furniture, household items, electricity and clothing. Consumer confidence falls to its lowest level since 1974.
November 2022: Nurses and other NHS medical personnel vote to strike over failing wages, inflation, overwork and underfunding. Business investment falls and GDP declines.
December 2022: The Joseph Rowntree Foundation reports that over 3 million low-income UK households cannot afford to heat their homes. Shoplifting increases by 22%.
September 2023: Birmingham City Council, the largest local authority in Europe, declares itself effectively bankrupt.
The cost of living crisis is putting downward pressure on the value of the pound. This is because the crisis is leading to higher inflation, which makes the pound less attractive to foreign investors. Additionally, the crisis is reducing economic growth, which also makes the pound less attractive.
Russian Invasion of Ukraine Adds Uncertainty
On February 24, 2022, Russia invaded Ukraine in an escalation of the Russo-Ukrainian War which began in 2014. The invasion is the largest military conflict in Europe since World War II and has resulted in tens of thousands of casualties on both sides. The invasion has also caused a humanitarian crisis, with millions of Ukrainians displaced from their homes. The international community has condemned the invasion and imposed sanctions on Russia. The International Criminal Court is investigating possible war crimes and crimes against humanity committed by Russian forces.
Recent Key Events
June 2023: The Ukrainian counteroffensive in June 2023 made significant progress, with Ukraine liberating villages and reclaiming territory in the eastern Donbas region. The Wagner Group's rebellion against the Russian government was a major setback for Russia.
August 2023: Ukraine counteroffensive slowed by millions of mines laid by Russia. Ukrainian drones damage the Russian landing ship Olenegorsky Gornyak.
September: An attack on Russian naval targets in Sevastopol damages the Black Sea fleet. Several oil and gas drilling platforms on the Black Sea held by Russia since 2015 have been retaken.
The war in Ukraine is having a negative impact on the global economy, including the value of the pound. The war has caused energy prices to soar and disrupted supply chains, which are putting upward pressure on inflation and weighing on the UK economy.
Gavin Pearson
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