Pound Sterling Forex Reference April (CPI, labour updates)
Sticky inflation may require further action from the Bank of England
DERBYSHIRE GB / APR 19 - This is the Pound Sterling Forex Reference and contains factual information that has been researched from official sources as well as market commentators. It is intended to be used as a guide to aid in your analysis.
MONETARY POLICY
The Bank of England
The Bank of England is the Central Bank of the United Kingdom and monetary policy decisions are made by the nine members of the Monetary Policy Committee (MPC).
The Bank of England's Monetary Policy Committee (MPC) voted to increase the Bank Rate by 0.25 percentage points to 4.25%. This is the eleventh consecutive rate hike in an effort to bring inflation back to its 2% target. The MPC's decision was based on strong global growth, elevated core consumer price inflation, and a fall in wholesale gas futures and oil prices.
The MPC will continue to closely monitor indications of persistent inflationary pressures, including the tightness of labour market conditions and the behaviour of wage growth and services inflation. If there were to be evidence of more persistent pressures, further tightening in monetary policy would be required.
The next Monetary Policy Committee meeting is on Thursday, May 11.
Sources: The Bank of England, Trading Economics
February 2023 Monetary Policy Report
The Bank of England's Monetary Policy Committee (MPC) revised its economic forecast for the UK at their February meeting. They will update them again at the May meeting.
Wholesale energy prices have fallen, but domestic inflation is still high.
Inflation in the services sector rose to a 30-year high in December, while pay growth in the private sector also accelerated.
Potential growth has been revised down, with economic expansion expected to be weak at 1% per year.
GDP is expected to decline slightly in 2023 and 2024 Q1, but the decline will be less severe than previously expected.
The labour market is tight, but demand is weakening, leading to an increase in economic slack.
ECONOMIC DATA
Gross Domestic Product (GDP)
Measures the quarter on quarter change of the inflation-adjusted value of produced goods and services.
UK GDP grew by 0.1% in Q4 2022, beating expectations and revised up from 0%. Services and construction grew, but production was flat. Real GDP is 0.6% below pre-COVID levels. The GDP implied deflator rose by 7.3%, driven by higher costs for households. Household savings increased to 9.3% and real disposable income rose 1.3%.
The MPC projects growth to contract by 0.7% in 2024, up from -2.0% previously. Trading Economics forecasts Q2 growth of 0.3%, up from 0.2% previously.
Jeepson Trading holds a slightly optimistic view that UK growth will be better than the contraction forecasted.
The Q1 2023 preliminary report is due on Thursday the 11th of May.
Sources: Office for National Statistics, Trading Economics
CONSUMER PRICE INDEX
Measures the yearly change in the price of goods and services purchased by consumers.
Headline CPI in the UK fell to 10.1% inflation in March, higher than the 9.8% expected and remaining close to the forty-year high but below the previous 10.4%. The significant movers were Food and non-alcoholic beverages climbing from 18.0% to 19.1% while transport fell from 2.9% to 0.8%.
The MPC had projected 9.7% for Q1 with a fall to 8.5% in Q2 while Trading Economics are forecasting 7.4% in Q2.
Jeepson Trading holds a slightly pessimistic view that UK CPI will improve as much as forecasted.
The April report is due on Wednesday the 24th of May.
Sources: Office for National Statistics, Trading Economics
LABOUR
Unemployment rate measures the number of people actively looking for a job as a percentage of the labour force.
UK employment increased to 75.8%, driven by part-time and self-employed. Unemployment increased to 3.8%, driven by short-term unemployment. Pay increased by 5.9% and 6.6%, but real pay fell by 3.0% and 2.3%. There were 348,000 working days lost due to labour disputes in Feb 2023, up from 210,000 in Jan 2023.
This matches the MPC projection of 3.8% unemployment for Q1 with a climb to 4.4% by next year while Trading Economics are forecasting 4.0% in Q2, up from 3.8%.
Jeepson Trading holds the view that UK unemployment will deteriorate as forecasted.
The February report is due on Thursday the 18th of April.
Sources: Office for National Statistics, Trading Economics
GEOPOLITICAL EVENTS
The War in Ukraine
The war in Ukraine has hurt the UK economy and caused the value of the GBP to fall against other major currencies. This is due to uncertainty, supply disruptions, and safe-haven demand. The impact of the war is likely to be temporary, but it has highlighted the vulnerability of the UK economy to geopolitical shocks.
UK Left the European Union
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 value of the GBP has fallen against the US dollar, the euro, and other major currencies.
On a positive note, the EU-UK Trade and Cooperation Agreement (TCA) is a comprehensive trade deal that covers goods, services, fisheries, and much more. It entered into force on January 1, 2021. The TCA is expected to boost trade between the EU and the UK, and it is also expected to create jobs and economic growth in both regions.
MARKET THEMES
Economic Growth Narrative
The UK economy is expected to lag behind its G7 counterparts in terms of post-pandemic economic recovery. The UK economy saw a difficult end to 2022, but has since improved thanks to the more fiscally responsible government of Prime Minister Sunak and Chancellor Hunt. However, there are still a number of headwinds facing the UK economy, such as striking trade unions, high inflation, tighter credit conditions and the cost of living crisis.
In 2024, the UK is forecasted to grow 1.00% while France is 1.40% and Germany fairs even better at 1.50%
Optimistic growth sentiment will support sterling, but pressure the stock market.
Pessimistic growth sentiment will support the stock market, but pressure sterling.
February 2nd: BoE commentary leads to optimistic growth sentiment
The Bank of England raised interest rates by 50 basis points to 4%, as expected. However, the bank's commentary was less hawkish than in previous announcements, with officials suggesting that inflation is set to peak soon and the economy will contract less than previously thought. Sterling fell against the US dollar as the latter strengthened, following higher than expected US jobs data that suggests the Federal Reserve will need to remain hawkish for longer.
February 15th: Hot CPI leads to pessimistic growth sentiment
The pound fell after hot inflation data showed price pressures persisting, increasing bets on more aggressive Bank of England rate hikes.
March 10th: Silicon Valley Bank Collapse leads to risk-on moves
Bank collapse due to poor risk management and investor panic considered to induce Fed dovishness and a weaker US dollar.
March 17th: First Republic Bank Rescue Deal improves risk-on sentiment
Bank bailout by major U.S. banks on March 16, 2023, improves confidence, leads to Fed dovishness and a weaker US dollar.
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