The Pound's Uncertain Future: A Macroeconomic Analysis
Monday, 09 September, Week 37
This report provides a concise analysis of the macroeconomic landscape of Great Britain (GB) and its currency, the British pound (GBP), focusing on the implications for forex traders interested in the GBP/USD pair. The report analyses recent economic developments, monetary policy decisions, and upcoming economic indicators, providing actionable insights to navigate the complexities of the British market. The Bank of England's recent rate cut, the persistent strength of the British pound, and the evolving dynamics of the global economy are key factors influencing the GBP/USD pair.
The UK economy has demonstrated resilience, with GDP growth exceeding expectations in the first half of 2024. However, underlying momentum appears weaker, and the Bank of England anticipates a slowdown in the second half of the year. Inflation has returned to the 2% target, but concerns remain about the persistence of domestic inflationary pressures. The labour market is loosening but remains relatively tight. The market-implied path for interest rates suggests a decline to around 3½% by the end of the three-year forecast period. The recent appreciation of sterling, if sustained, could exert downward pressure on import prices and CPI inflation.
The Geopolitical Landscape: Uncertainty and Its Impact on the GBP
The geopolitical climate plays a significant role in determining the value of the British Pound (GBP). Recent events have highlighted the vulnerability of the GBP to global developments. The ongoing Ukraine conflict and Middle East tensions have created heightened geopolitical uncertainty over the past six months. This has resulted in risk aversion in global markets and has had a negative impact on the GBP.
For example, the escalation of the Israel-Hezbollah conflict raised concerns about energy dependency and potential consequences for the UK economy, leading to further depreciation of the GBP. The geopolitical outlook remains uncertain, with various factors such as the potential escalation of the Ukraine conflict, ongoing Middle East tensions, the UK-EU trade deal, and domestic political instability all having the potential to impact the GBP.
The geopolitical landscape remains a key driver of uncertainty for the UK and the GBP. The evolving situations in Ukraine and the Middle East, the UK's relationship with the EU, and the domestic political landscape will continue to shape the currency's performance in the coming months.
Economic Fundamentals: Navigating a Slowdown
In the past six months, GDP growth has fallen from 4.3% in 2022 to an estimated 0.1% in 2023. The past month has seen a continuation of these trends, with mixed economic data releases providing further insights into the health of the UK economy.
GDP figures showed that the UK economy grew by 0.6% in the three months to June 2024, following growth of 0.7% in the three months to March 2024. However, the figures also showed that the UK economy stalled in June 2024, following unrevised growth of 0.4% in May 2024. The latest inflation figures, released on August 14th, showed that the Consumer Price Index (CPI) rose by 2.2% in the 12 months to July 2024, up from 2.0% in June 2024. The figures also showed that CPI fell by 0.2% in July 2024, compared with a fall of 0.4% in July 2023.
The labor market data, released on August 13th, showed that the UK employment rate increased to 74.5% in April to June 2024, up from 74.4% in the previous quarter. The unemployment rate fell to 4.2% in April to June 2024, down from 4.4% in the previous quarter. These figures suggest that the UK labor market remains robust, despite the economic slowdown.
"The UK economy is facing a number of headwinds, including high inflation, rising interest rates, and slowing global growth. However, the UK economy also has a number of strengths, including a flexible labour market and a strong financial sector. The outlook for the UK economy is uncertain, but there are reasons to be both optimistic and pessimistic." - OECD Economic Outlook, August 2024
The UK economy is facing a number of challenges, but there are also reasons to be optimistic about the outlook. The government's fiscal and monetary policies are likely to play a key role in shaping the economic outlook in the upcoming months.
Monetary Policy: A Shift Towards Accommodation
The Bank of England
The Bank of England (BoE) has been on a tightening path since December 2021 to combat rising inflation, raising interest rates eleven times. However, at its July meeting, the BoE signalled a shift towards a more accommodative stance by cutting Bank Rate by 25 basis points to 5%. This decision came after six months of continuous rate increases. The previous six months saw the BoE raise Bank Rate from 4.5% in March to 5.25% in June in an effort to control inflation.
The BoE's decision to cut rates was driven by several factors, including the recent fall in CPI inflation to the 2% target, signs of a slowing economy, and the belief that previous rate hikes have had sufficient time to filter through the economy. The minutes from the BoE's July meeting revealed a divided Monetary Policy Committee (MPC), with a 5-4 vote in favour of the rate cut. While some members expressed concerns about persistent domestic inflationary pressures, others argued that the risks to economic growth from higher interest rates outweighed these concerns.
The market reaction to the BoE's rate cut was mixed. The British pound initially weakened against the US dollar but later recovered some losses. Investors are now considering the BoE's reasoning for the rate cut and assessing its implications for future monetary policy. The BoE's next policy decision is scheduled for September, and the market will be closely monitoring any further indications of a shift in the central bank's stance.
Over the next six months, the direction of the UK's monetary policy and the British pound (GBP) will be influenced by economic data, particularly inflation and growth rates. The Bank of England (BoE) has indicated its commitment to closely monitoring the economy and adjusting monetary policy as necessary.
Currently, the market anticipates a 25 basis point interest rate cut by the BoE before the end of the year, with a 39% chance of a cut at the September meeting. However, the BoE's decision will be driven by data, with the trajectory of interest rates dependent on the strength of the economy and the persistence of inflationary pressures.
Upcoming releases of key economic indicators, such as the August CPI inflation report, September GDP growth figures, and August labor market report, will hold significant importance in shaping the BoE's monetary policy choices.
"The Bank of England faces a delicate balancing act in the coming months. The central bank must weigh the need to control inflation against the need to support economic growth. The BoE's decisions will be closely watched by market participants, and will have a significant impact on the British pound." - Financial Times, August 2024
The BoE's recent rate cut signals a shift towards a more accommodative stance, but the central bank remains vigilant about inflationary pressures. The upcoming months will be crucial in determining the future path of UK monetary policy, with the BoE's decisions likely to have a significant impact on the GBP.
Macroeconomic Outlook: A Gradual Recovery Amidst Uncertainty
The macroeconomic outlook for the UK is for a gradual recovery over the mid-term, supported by easing interest rates, and continued government investment in key areas. However, the outlook remains subject to a number of risks, both domestic and global, that could derail this trajectory.
Thesis
The macroeconomic outlook for the UK 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.
The outlook for the GBP in the upcoming month is mixed. On the one hand, the BoE's recent rate cut and the possibility of further cuts could weigh on the currency. On the other hand, the GBP could be supported by safe-haven demand amid ongoing geopolitical tensions.
Key Economic Indicators to Watch: A Forex Trader's Guide
The following is a bullet-list of the key economic events that are due within the upcoming month and could be instrumental to the macroeconomic outlook:
Unemployment Rate (JUL) - UK: Forecast: 4.10%, Previous: 4.20%. Due: Tuesday, September 10th, Week 36 (Lagging).
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 labor 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: A Cautious Outlook for the GBP
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 GBP/USD pair is likely to be influenced by a number of factors in the coming months, including the divergence in monetary policy between the BoE and the Fed, the evolution of inflationary pressures in the UK, and the overall global economic outlook. Forex traders should closely monitor these developments and adjust their trading strategies accordingly.
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