The Pound's Balancing Act: Navigating a Shifting Macroeconomic Landscape
Saturday, 14 September, Week 37
Welcome to this comprehensive macroeconomic report on the United Kingdom and the British pound. This report aims to provide forex traders with actionable insights to navigate the complexities of the British market. We will delve into recent economic developments, monetary policy decisions, and upcoming economic indicators, offering a clear and concise analysis of the factors influencing the GBP/USD pair.
Market volatility has recently been driven by a confluence of factors, including:
Weaker-than-expected US jobs data: The August US jobs report fell short of market expectations, raising concerns about a potential slowdown in the US economy and fuelling speculation of a larger-than-anticipated rate cut by the Federal Reserve.
Hawkish signals from the Bank of Japan: Statements from BOJ officials and revised forecasts from Fitch pointed towards a more hawkish stance on monetary policy, supporting the Japanese yen and putting pressure on carry trades.
Mixed UK economic data: The UK economy showed signs of both strength and weakness, with a rebound in retail sales but a contraction in manufacturing activity and a larger-than-expected government budget deficit.
Bank of England's rate cut: The BoE's decision to cut Bank Rate by 25 basis points to 5% in July, while widely anticipated, has created uncertainty for currency traders, who are now assessing the central bank's future policy path.
Market Themes
The following market themes have influenced the financial markets of GB and the GBP during the previous month:
Global risk sentiment: The global risk sentiment has been volatile, driven by concerns about the US economy, geopolitical tensions, and the potential for a recession.
US dollar weakness: The US dollar has weakened against major currencies, including the GBP, as traders anticipate a September rate cut by the Federal Reserve.
Bank of England monetary policy: The BoE's recent rate cut and the possibility of further cuts have created uncertainty for currency traders, who are now assessing the central bank's future policy path.
UK economic data: Mixed economic data releases have provided further insights into the health of the UK economy, with some indicators pointing to strength while others suggest weakness.
Global Risk Sentiment
The global risk sentiment has been volatile over the past month, driven by concerns about the US economy, geopolitical tensions, and the potential for a recession. The weaker-than-expected US jobs report released on Friday, September 6th, amplified these concerns, leading to a flight to safe-haven assets and a decline in risk-sensitive currencies, including the GBP.
September 13th: The US dollar index (DXY) fell towards 101, extending losses from the previous session, fuelled by growing expectations of a more aggressive rate cut by the Fed.
September 6th: The weaker-than-expected US jobs report fuelled a global risk-off sentiment, leading to a decline in risk-sensitive currencies, including the GBP.
Bank of England Monetary Policy
The BoE's recent rate cut and the possibility of further cuts have created uncertainty for currency traders, who are now assessing the central bank's future policy path. The market is currently pricing in a 39% chance of a 25 basis point rate cut by the BoE at its September meeting.
July 31st: The BoE cut Bank Rate by 25 basis points to 5%, signalling a shift towards a more accommodative stance.
June 19th: The BoE voted to maintain the Bank Rate at 5.25%, but two members preferred a 25 basis point reduction.
March 2024: The BoE began raising the Bank Rate from 4.5% to combat rising inflation.
UK Economic Data
Mixed economic data releases have provided further insights into the health of the UK economy, with some indicators pointing to strength while others suggest weakness. The rebound in retail sales in July was a positive sign, but the contraction in manufacturing activity and the larger-than-expected government budget deficit raised concerns.
August 14th: The CPI rose by 2.2% in the 12 months to July 2024, up from 2.0% in June 2024.
August 13th: The UK employment rate increased to 74.5% in April to June 2024, up from 74.4% in the previous quarter.
July 31st: UK GDP grew by 0.6% in the three months to June 2024, following growth of 0.7% in the three months to March 2024.
The Geopolitical Landscape
The geopolitical landscape is expected to remain a key source of uncertainty in the upcoming month. The potential for escalation in the Ukraine conflict and ongoing tensions in the Middle East could lead to increased risk aversion in global markets, weighing on the GBP.
Potential escalation in the Ukraine conflict: The conflict in Ukraine shows no signs of abating, and the potential for escalation remains a significant risk. Any further escalation could lead to increased sanctions on Russia, disrupting global energy markets and weighing on the global economy.
Ongoing tensions in the Middle East: Tensions in the Middle East, particularly between Iran and Israel, remain high. Any escalation in these tensions could disrupt global oil supplies and lead to increased geopolitical uncertainty.
Fiscal Policy
The larger-than-expected government budget deficit in July raised concerns about the UK's fiscal health.
Larger-than-expected government budget deficit: The larger-than-expected government budget deficit in July raised concerns about the UK's fiscal health. The government's borrowing costs have increased in recent months, reflecting these concerns.
Potential tax hikes: The government has hinted at the possibility of tax hikes in the future to address the budget deficit. Any tax hikes could weigh on economic growth and the GBP.
Economic Fundamentals
The UK economy is expected to continue its gradual recovery in the upcoming month, but the outlook remains uncertain.
Rebound in retail sales: The rebound in retail sales in July was a positive sign, suggesting that consumer spending may be starting to recover.
Contraction in manufacturing activity: The contraction in manufacturing activity in July was a negative sign, suggesting that the manufacturing sector is struggling in the face of higher interest rates and slowing global growth.
Larger-than-expected government budget deficit: The larger-than-expected government budget deficit in July raised concerns about the UK's fiscal health.
Monetary Policy
The Bank of England (BoE) cut Bank Rate by 25 basis points to 5% in July, signalling a shift towards a more accommodative stance. The market is currently pricing in a 39% chance of a 25 basis point rate cut by the BoE at its September meeting.
The BoE's monetary policy is expected to remain accommodative in the upcoming month, with the central bank likely to cut interest rates further if the economy weakens or inflation falls below target.
Recent rate cut: The BoE's recent rate cut signals a shift towards a more accommodative stance.
Inflation outlook: Inflation is expected to remain above the BoE's 2% target in the near term, but it is forecast to fall back towards target in the medium term.
Economic outlook: The UK economy is expected to continue its gradual recovery in the upcoming month, but the outlook remains uncertain.
Macroeconomic Outlook
The macroeconomic outlook for the UK and the GBP in the upcoming month is for continued moderation in inflation, a softening labour market, and modest economic growth. The Bank of England's recent rate cut could further weaken the British pound. However, the GBP's decline may be limited by the ongoing geopolitical tensions, which are supporting safe-haven demand for the currency.
Key Economic Indicators to Watch
Unemployment Rate (JUL) - UK: Forecast: 4.10%, Previous: 4.20%. Due: Tuesday, September 10th, Week 36 (Lagging). If the actual result aligns with the forecast, it would indicate a further decline in the unemployment rate, potentially signalling a tight labour market, which could limit the GBP's decline.
Average Earnings incl. Bonus (3Mo/Yr) (JUL) - UK: Forecast: 4.10%, Previous: 4.50%. Due: Tuesday, September 10th, Week 36 (Lagging). If the actual result aligns with the forecast, it would indicate a further slowdown in wage growth, potentially easing inflationary pressures and supporting the BoE's dovish stance, which could weigh on the GBP.
Employment Change (JUL) - UK: Forecast: 30.0K, Previous: 97K. Due: Tuesday, September 10th, Week 36 (Lagging). A weaker-than-expected employment change figure could signal a softening labour market, potentially supporting the case for further BoE rate cuts and weighing on the GBP.
GDP MoM (JUL) - UK: Forecast: 0.20%, Previous: 0%. Due: Wednesday, 11 September, Week 36 (Lagging). A positive GDP growth figure could signal a continued recovery in the UK economy, potentially limiting the GBP's decline.
GDP 3-Month Avg (JUL) - UK: Forecast: 0.50%, Previous: 0.60%. Due: Wednesday, 11 September, Week 36 (Lagging). A positive 3-month average GDP growth figure could signal a continued recovery in the UK economy, potentially limiting the GBP's decline.
Goods Trade Balance (JUL) - UK: Forecast: £-18B, Previous: £-18.89B. Due: Wednesday, 11 September, Week 36 (Lagging). A smaller trade deficit than expected could signal a slight improvement in the UK's trade balance, potentially limiting the GBP's decline.
Goods Trade Balance Non-EU (JUL) - UK: Forecast: £-6.8B, Previous: £-7.46B. Due: Wednesday, 11 September, Week 36 (Lagging). A smaller trade deficit with non-EU countries than expected could signal a slight improvement in the UK's trade balance, potentially limiting the GBP's decline.
Industrial Production MoM (JUL) - UK: Forecast: 0.30%, Previous: 0.80%. Due: Wednesday, 11 September, Week 36 (Lagging). A weaker-than-expected industrial production figure could signal a slowdown in the manufacturing sector, potentially weighing on the GBP.
Manufacturing Production MoM (JUL) - UK: Forecast: 0.20%, Previous: 1.10%. Due: Wednesday, 11 September, Week 36 (Lagging). A weaker-than-expected manufacturing production figure could signal a slowdown in the manufacturing sector, potentially weighing on the GBP.
Inflation Rate YoY (AUG) - UK: Previous: 2.20%. Due: Wednesday, 18 September, Week 36 (Lagging). A higher-than-expected inflation figure could raise concerns about persistent inflationary pressures, potentially supporting the case for a more hawkish BoE stance and limiting the GBP's decline.
Core Inflation Rate YoY (AUG) - UK: Previous: 3.30%. Due: Wednesday, 18 September, Week 36 (Lagging). A higher-than-expected core inflation figure could raise concerns about persistent inflationary pressures, potentially supporting the case for a more hawkish BoE stance and limiting the GBP's decline.
Inflation Rate MoM (AUG) - UK: Previous: -0.20%. Due: Wednesday, 18 September, Week 36 (Lagging). A positive inflation figure could signal a potential uptick in inflationary pressures, potentially supporting the case for a more hawkish BoE stance and limiting the GBP's decline.
BoE Interest Rate Decision - UK: Due: Thursday, 19 September, Week 36. The market is currently pricing in a 39% chance of a 25 basis point rate cut by the BoE. A rate cut would likely weigh on the GBP, while a decision to hold rates steady could provide some support to the currency.
GfK Consumer Confidence (SEP) - UK: Previous: -13. Due: Friday, 20 September, Week 36 (Leading). A higher-than-expected consumer confidence figure could signal improving sentiment in the UK economy, potentially limiting the GBP's decline.
Retail Sales MoM (AUG) - UK: Previous: 0.50%. Due: Friday, 20 September, Week 36 (Lagging). A positive retail sales figure could signal a continued recovery in consumer spending, potentially limiting the GBP's decline.
Retail Sales ex Fuel MoM (AUG) - UK: Previous: 0.70%. Due: Friday, 20 September, Week 36 (Lagging). A positive retail sales figure excluding fuel could signal a continued recovery in consumer spending, potentially limiting the GBP's decline.
Retail Sales YoY (AUG) - UK: Previous: 1.40%. Due: Friday, 20 September, Week 36 (Lagging). A higher-than-expected retail sales figure could signal a continued recovery in consumer spending, potentially limiting the GBP's decline.
S&P Global Composite PMI Flash (SEP) - UK: Forecast: 53, Previous: 53.8. Due: Monday, 23 September, Week 37 (Leading). A reading above 50 indicates expansion in the private sector. If the actual result aligns with the forecast, it would suggest a continued expansion in the UK economy, potentially limiting the GBP's decline.
S&P Global Manufacturing PMI Flash (SEP) - UK: Forecast: 51.9, Previous: 52.5. Due: Monday, 23 September, Week 37 (Leading). A reading above 50 indicates expansion in the manufacturing sector. If the actual result aligns with the forecast, it would suggest a continued expansion in the UK manufacturing sector, potentially limiting the GBP's decline.
S&P Global Services PMI Flash (SEP) - UK: Forecast: 55, Previous: 53.7. Due: Monday, 23 September, Week 37 (Leading). A reading above 50 indicates expansion in the services sector. If the actual result aligns with the forecast, it would suggest a continued expansion in the UK services sector, potentially limiting the GBP's decline.
CBI Industrial Trends Orders (SEP) - UK: Forecast: -19, Previous: -22. Due: Monday, 23 September, Week 37 (Leading). A less negative reading than expected could signal a potential improvement in the UK's manufacturing sector, potentially limiting the GBP's decline.
CBI Distributive Trades (SEP) - UK: Forecast: -7, Previous: -27. Due: Wednesday, 25 September, Week 37 (Leading). A less negative reading than expected could signal a potential improvement in the UK's retail sector, potentially limiting the GBP's decline.
Current Account (Q2) - UK: Forecast: £-14.8B, Previous: £-21B. Due: Monday, 30 September, Week 39 (Lagging). A smaller current account deficit than expected could signal a slight improvement in the UK's balance of payments, potentially limiting the GBP's decline.
GDP Growth Rate QoQ Final (Q2) - UK: Forecast: 0.60%, Previous: 0.70%. Due: Monday, 30 September, Week 39 (Lagging). A higher-than-expected GDP growth figure could signal a stronger-than-anticipated recovery in the UK economy, potentially limiting the GBP's decline.
GDP Growth Rate YoY Final (Q2) - UK: Forecast: 0.90%, Previous: 0.30%. Due: Monday, 30 September, Week 39 (Lagging). A higher-than-expected GDP growth figure could signal a stronger-than-anticipated recovery in the UK economy, potentially limiting the GBP's decline.
BoE Consumer Credit (AUG) - UK: Forecast: £1.07B, Previous: £1.215B. Due: Monday, 30 September, Week 39 (Lagging). A weaker-than-expected consumer credit figure could signal a potential slowdown in consumer spending, potentially weighing on the GBP.
Mortgage Approvals (AUG) - UK: Forecast: 61.2K, Previous: 61.99K. Due: Monday, 30 September, Week 39 (Leading). A decline in mortgage approvals could signal a weakening housing market, potentially adding to the pressure on the GBP.
Mortgage Lending (AUG) - UK: Forecast: £1.8B, Previous: £2.79B. Due: Monday, 30 September, Week 39 (Lagging). A weaker-than-expected mortgage lending figure could signal a potential slowdown in the housing market, potentially weighing on the GBP.
Nationwide Housing Prices MoM (SEP) - UK: Forecast: -0.20%, Previous: 0.80%. Due: Wednesday, 02 October, Week 40 (Lagging). A decline in the Nationwide House Price Index could signal a cooling housing market, potentially adding to the pressure on the GBP.
Nationwide Housing Prices YoY (SEP) - UK: Forecast: 2.40%, Previous: 2.30%. Due: Wednesday, 02 October, Week 40 (Lagging). A weaker-than-expected house price growth figure could signal a cooling housing market, potentially adding to the pressure on the GBP.
S&P Global Construction PMI (SEP) - UK: Forecast: 52.7, Previous: 53.6. Due: Friday, 04 October, Week 40 (Leading). A reading above 50 indicates expansion in the construction sector. If the actual result aligns with the forecast, it would suggest a continued expansion in the UK construction sector, potentially limiting the GBP's decline.
Conclusion
The UK economy is at a turning point, with the Bank of England's recent rate cut signalling a shift towards a more accommodative monetary policy stance. While the economy has shown resilience in the face of global headwinds, the outlook remains uncertain. The upcoming releases of key economic indicators will be crucial in determining the future path of UK monetary policy and the GBP's performance.
The upcoming week is expected to be dominated by the Federal Reserve's interest rate decision. A larger-than-expected rate cut by the Fed could weaken the US dollar and support the GBP. However, the GBP's gains may be limited by concerns about the UK economy and the potential for further BoE rate cuts.
Sources
Bank of England
Office for National Statistics
Trading Economics
Bloomberg
Reuters
Financial Times
The Guardian
The Telegraph
The Independent
The Economist
World Economic Forum
International Monetary Fund
Bank for International Settlements
S&P Global
Ivey Business School
Confederation of British Industry
GfK Group
Nationwide Building Society
Halifax
BRC - British Retail Consortium
Lloyds Bank
KPMG
REC
Deloitte
Citigroup
JPMorgan
Jefferies
RBC
Goldman Sachs
ForexLive