DERBYSHIRE GB / MAY 21 - 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.
ABOUT THE POUND STERLING
The pound sterling, or GBP, is the official currency of the United Kingdom. It is the oldest currency in continuous use and is the fourth most traded currency in the world.
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 4.50% on the 11th of March. This is the eleventh consecutive rate hike in an effort to bring inflation back to its 2% target. The MPC expects CPI inflation to fall sharply from April but will continue to raise interest rates if necessary to return inflation to the 2% target.
The next Monetary Policy Committee meeting is on Thursday, June 22.
The Monetary Policy Committee‘s May statement contained cautious sentiments with regards to the approach to monetary policy:
The Committee judges that the risks around the inflation forecast are skewed significantly to the upside
The Committee will continue to closely monitor indications of persistent inflationary pressures
The Committee will adjust Bank Rate as necessary to return inflation to the 2% target sustainably in the medium term.
Sources: The Bank of England, Trading Economics
May 2023 Monetary Policy Report
The Bank of England's Monetary Policy Committee (MPC) revised its economic forecast for the UK at their May meeting. They will update them again in August.
Increased the Bank Rate by 0.25 percentage points, to 4.5%
Expects CPI inflation to fall sharply from April, but to remain above the 2% target in the medium term
Continuing to address the risk of more persistent strength in domestic price and wage setting
Continuing to closely monitor indications of persistent inflationary pressures
Will adjust Bank Rate as necessary to return inflation to the 2% target sustainably in the medium term
Inflation has been rising sharply in recent months, driven by
the war in Ukraine
rising energy prices
supply chain disruptions
The MPC is concerned that inflation could become entrenched if it is not brought under control
The raising of the Bank Rate is to slow the pace of economic growth and bring inflation back down to the 2% target
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 Q1 2023, matching expectations. Services and Production grew 0.1% and construction grew 0.7%. Real GDP is 0.5% below pre-COVID levels. In expenditure terms, household consumption showed no growth on the quarter, while there was a positive contribution from gross fixed capital formation.
The MPC projects growth to expand by 0.9% in 2024, up from -0.3% previously. Trading Economics forecasts Q2 growth of 0.3%, up from 0.2% previously. The Q1 2023 final report is due on Friday the 30th of June.
The outlook for growth remains uncertain, but it can be characterised as optimistic improvement. This means that expansion is likely and at higher levels than previously thought.
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. The April report is due on Wednesday the 24th of May.
The outlook for CPI can be characterised as a slightly pessimistic improvement. This means that a lower rate of inflation is likely, but it is not expected to be as low as projected.
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.
Employment increased slightly to 75.9% from 75.8%, driven by part-time and self-employed
Payrolled employees decreased by 136,000
Unemployment rate increased slightly to 3.9% from 3.8%
Inactivity rate decreased to 21.0%
Vacancies fell by 55,000
Average total pay increased by 5.8% and average regular pay increased by 6.7%
In real terms, growth in total and regular pay fell on the year
There were 556,000 working days lost because of labour disputes in March 2023.
The MPC unemployment projection for Q2 remains at 3.9% in Q2 while Trading Economics are forecasting 4.0% in Q2, unchanged from the previous forecast.
The outlook for UK unemployment can be characterised as an indifferent deterioration. This means that a higher rate of unemployment is likely at the levels projected.
The April report is due on Tuesday the 13th of June.
Sources: Office for National Statistics, Trading Economics
GEOPOLITICAL EVENTS and MARKET THEMES
GEOPOLITICAL: The War in 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
A refugee crisis
Geopolitical uncertainty
2021: 92,000 Russian troops are amassed at the Ukraine border and President Putin proposes a prohibition of Ukraine joining NATO which is rejected.
2022: On the 21st of February, President Putin ordered Russian forces to enter the separatist republics in eastern Ukraine and announced recognition of the two pro-Russian breakaway regions (Donetsk People's Republic and Luhansk People's Republic). Further economic sanctions from NATO were applied as the war raged on although by the second half of the year, Ukraine successfully mounted a counter-offensive to regain some of the lost territory and as winter arrived, a stalemate began.
2023: Russian began a new offensive in January although gained little ground. Ukraine is reported to be preparing for a new counteroffensive during Spring 2023.
GEOPOLITICAL: UK Leaves 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.
2014-2015: PM Cameron promises to hold a referendum on the UK's membership of the EU in 2015 if the Conservatives win the 2015 general election. The euro-sceptic party UKIP garners support and scores the most seats in the EU parliament election. The Conservatives win the election and arrange the referendum for June 23, 2016.
2016: 52% vote for the UK to leave the EU and David Cameron resigns as PM and new Conservative leader Theresa May takes the helm. In October, Article 50 is triggered and the two-year process of the UK's withdrawal from the EU begins.
2017-2018: PM May calls a snap general election and loses the majority but retains power by sharing with the Democratic Unionist Party (DUP). Withdrawal agreements fail to pass parliament, an extension is made but further revisions to the agreement continue to be rejected by parliament.
2019: Theresa May resigns and Boris Johnson becomes Prime Minister who gains another extension from the EU to enable further negotiations. The deadline is now January 31, 2020. The Conservatives win the General Election In December which gives back the majority to the Conservative Party.
2020: With negotiations stained and the deadline having passed, the UK is forced to leave the EU without a deal. Negotiations continue and a deal is eventually agreed which comes into effect on the 1st of January 2021. The EU-UK Trade and Cooperation Agreement (TCA) is a comprehensive trade deal that covers goods, services, fisheries, and much more.
MARKET THEME: UK Economic Growth
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
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