Uncertainties Amidst BoE's Policy and Global Challenges
Friday, 20 September, Week 38
Welcome, Forex traders. This macroeconomic report on the United Kingdom and the British pound offers insights to inform your trading decisions. We'll examine recent economic developments, monetary policy, and upcoming economic indicators, providing a clear picture of the factors influencing the British pound.
The pound has shown resilience against the US dollar recently, supported by expectations that the Federal Reserve will adopt a more aggressive rate-cutting approach than the Bank of England which has contributed to the pound's strength.
Bank of England Policy Uncertainty
Over the last month, uncertainty regarding the Bank of England's (BoE) future monetary policy has significantly impacted sentiment surrounding the British pound (GBP). With the Fed's recent 50 bps rate cut, the BoE's next move remains a key focal point for traders.
Here's a timeline of events fuelling this uncertainty:
September 19th, Week 38: The BoE maintained the Bank Rate at 5%, a decision in line with market expectations. They also announced a £100 billion reduction in the stock of UK government bond purchases over the next 12 months, totalling £558 billion.
September 6th, Week 37: Governor Bailey's suggestion of more interest rate cuts to support mortgage holders, despite slowing inflation, further fuelled market speculation.
July 31st, Week 31: The BoE reduced the Bank Rate by 25bps to 5%, its first reduction in over four years.
The Geopolitical Landscape
The ongoing war in Ukraine and tensions in the Middle East remain significant geopolitical factors affecting the GB and the GBP. The war's disruption of global energy markets has contributed to higher energy prices in the UK, impacting inflation and the overall economic outlook.
The potential for further escalation in the conflict and its ramifications on global energy markets is a continued concern. The possibility of a prolonged conflict, coupled with increased sanctions against Russia, could exacerbate energy supply disruptions and put further pressure on the global economy.
Fiscal Policy
Chancellor Reeves recently stated: "The upcoming budget will involve “difficult decisions” on tax, spending, and welfare." This statement underscores the challenging fiscal landscape the government must navigate.
The budget announcement, scheduled for October 30th, will be a critical event as investors analyse the government's plans to address the deficit. Potential tax hikes or spending cuts will be closely watched, and the budget outcome could significantly influence market sentiment and the GBP's performance.
Economic Fundamentals
The UK economy presents a mixed picture of economic fundamentals. The rebound in retail sales is a positive sign, potentially indicating a recovery in consumer spending. However, the contraction in manufacturing activity and the larger-than-expected government budget deficit have fuelled concerns about the strength of the recovery. The recent rise in core inflation, exceeding market forecasts, has also raised concerns about persistent inflationary pressures.
The UK economic outlook remains uncertain. Government measures to stimulate growth, such as tax cuts and increased spending, have been implemented, but their effectiveness is yet to be seen. The possibility of a US recession, which could impact UK trade, further clouds the economic outlook.
Monetary Policy
The Bank of England (BoE) maintained the Bank Rate at 5% during its meeting on Thursday, opting for a cautious approach following the 25bps cut in July. This decision came amidst a backdrop of global uncertainty, with the Fed's recent aggressive rate cut adding to the complex landscape. While one member favoured a further reduction, the majority voted to hold steady, indicating a desire to assess the impact of the August cut and monitor incoming economic data.
Governor Bailey's previous hints at potential further rate cuts to support mortgage holders fuelled market speculation. However, the BoE's decision to hold rates steady suggests a shift towards a more data-dependent approach, as the central bank carefully weighs the risks of persistent inflation against the need to support economic growth.
The market remains divided on the likelihood of future rate cuts. Some analysts believe that the BoE will continue to hold rates at the current level for the remainder of the year, particularly if inflation remains above the 2% target. Others anticipate a potential rate cut in November or December, particularly if economic data weakens, especially in light of the Fed's shift towards easing.
The BoE's next meeting in November, will be critical in providing further clarity on the central bank's policy trajectory. Market participants will be closely watching the statement accompanying the rate decision for insights into the BoE's assessment of the economic outlook and any potential shift in its stance on future rate adjustments.
The Macroeconomic Outlook
The UK's macroeconomic outlook is currently uncertain. While inflation has shown signs of slowing, concerns persist about underlying inflationary pressures. The labour market shows signs of cooling, but unemployment remains historically low. The UK economy has displayed resilience, with GDP growth in the first half of 2024. However, underlying momentum appears weaker, and growth is projected to slow in the latter half of the year.
Overall, the macroeconomic outlook for the UK remains cautiously optimistic, but risks such as a potential US recession, persistent inflation, and the BoE's policy decisions could impact the trajectory in the upcoming month.
Key Economic Indicators to Watch
S&P Global Composite PMI Flash (SEP) - UK: Forecast: 53, Previous: 53.8. Due: Monday, September 23rd, Week 39 (Leading). A reading above 50 indicates expansion. A result in line with the forecast would suggest continued expansion in the UK economy, potentially limiting the GBP's decline.
CBI Industrial Trends Orders (SEP) - UK: Forecast: -19, Previous: -22. Due: Monday, September 23rd, Week 39 (Leading). A less negative figure than expected could suggest potential improvement in the UK manufacturing sector, potentially limiting the GBP's decline.
Conclusion
There is some uncertainty surrounding the Bank of England's monetary policy, and the global economic outlook is clouded by the potential for a US recession. Inflation shows signs of slowing, but underlying inflationary pressures remain a concern. The labour market is cooling, but unemployment remains low.
Looking ahead to the upcoming week, the forex market will likely be influenced by global risk sentiment and the US dollar's performance. The GBP could experience further weakness if UK economic data disappoints or if uncertainty surrounding the BoE's policy stance persists. Conversely, the GBP could strengthen if UK data surprises to the upside or if global risk sentiment improves.
Sources
Office for National Statistics (ONS)
Bank of England
Trading Economics
BRC - British Retail Consortium
S&P Global
GfK Group
Confederation of British Industry (CBI)
Reuters
Financial Times
Bloomberg