Economic Update
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From leaks to leaps: GBP surges post-budget reveal
6 minute read11 March 2024
GBP
Last week, GBP held a solid footing following Chancellor Hunt's Spring Budget on Wednesday. The major announcements of changing the non-dom tax scheme and reducing National Insurance were 'leaked' in the days leading up to the Budget, which meant the market reaction was muted – a definite tactic of the Treasury, who are still haunted by the mini-budget that crashed the pound in September 2022. The Office of Budget Responsibility raised GDP growth forecasts and predicted improvements for household disposable incomes, which has been reflected in the market, with GBP/EUR and GBP/USD showing positive trends and nearing 12-month highs.
This week is a busy UK data schedule including updates on the labour market and GDP. Recent developments in the labour market indicate a slight easing, though overall conditions remain tight. With the unemployment rate hovering at 3.8% during the three months leading up to December, it remains historically low. Despite this, the pace of average earnings growth slowed to 5.8% year-on-year in Q4 2023, marking the lowest expansion rate since Q1 2023. Forecasts suggest that the unemployment rate will persist at 3.8% in January, while average earnings growth is anticipated to marginally decelerate to 5.7% year-on-year.
Shifting focus to GDP, the UK economy managed to steer clear of the deep recession anticipated by many but did enter a shallow downturn in the latter half of 2023. GDP experienced a contraction of 0.1% in Q3 and further declined by 0.3% in Q4, partially attributed to a 0.1% month-on-month decrease in output observed in December. January's GDP figures are expected to reveal a 0.2% month-on-month increase, signalling a modest improvement to the start of 2024.
EUR
The ECB left interest rates unchanged for a fourth consecutive meeting at 4%. Lagarde continued to emphasise that it will ensure rates are sufficiently restrictive for as long as required to reach it's 2% inflation target. However, they indicated a rate cut in June is a possibility and the market bets are on three 25 bp cuts this year to 3.25%. In the United States, all eyes will be on the release of the US Consumer Price Index (CPI) for February this week. After a significant decline in the first half of 2023, CPI has since stabilised, fluctuating within a narrow range of 3.1% to 3.7%. Market expectations for February's data show a slight month-on-month increase, moving from 0.3% to 0.4%, while year-on-year estimates are expected to remain steady at 3.1%. A potential rise in CPI could lead to a short-term strengthening of the USD against other currencies. Conversely, if the figure falls below expectations, we could see GBP testing the 1.29 level. The US Federal Reserve Chair Powell testified before Congress last week. He discussed the current stance of monetary policy in a hearing before the Senate Banking Committee and stated: “it will likely be appropriate to begin dialling back policy restraint at some point this year”, all but confirming that US interest rates are at their peak in the current cycle barring any major changes to economic data. The Federal Reserve monetary policy committee are due to meet next week on Wednesday 20th March. USD
This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory.
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