Economic Update
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Does GDP growth data point to UK economic recovery?
6 minute read15 July 2024
GBP
England woke up deflated this morning, having almost secured a possible bank holiday with their first Euros win after Spain narrowly clenched the lead and the tournament.
In more positive news, the UK has continued to see better economic recovery, with last Thursday's Q2 GDP, which was previously forecast at 0.2%, came in higher at 0.4%. As a result, the market has reduced the possibility of the Bank of England cutting interest rates in August. A rate cut was expected at around 66% probability before the data releases, but it now sits at around 50%.
This week, the most significant UK announcement is the Consumer Price Index inflation readings on Wednesday, with market expectations that core inflation (that excludes volatile energy, food, tobacco and alcohol) will drop from 3.5% to 3.4% and headline inflation will fall from 2% to 1.9%.
Also, this week, we’ll see UK employment numbers released on Thursday, and unemployment is predicted to remain unchanged at 4.4%. Any deviation from these figures may cause some sterling volatility. Retail Sales data is due on Friday, and analysts are currently expecting a significant fall from the previous month’s 2.9% to -0.6%, which could have the potential to weaken sterling.
EUR
Europe's biggest event will be Thursday's interest rate decision from the European Central Bank. After cutting rates for the first time last month, the refinancing rate is expected to be held at 4.25%. Following the decision, GBP/EUR moved to a two-year high.
In her speech afterwards, the tone of the ECB's president, Christine Lagarde, may shed some light on whether more cuts are to come from the central bank this year. Markets currently expect another cut in September. Perhaps the biggest news over the weekend was the assassination attempt on ex-US president and Republican candidate Donald Trump. With the attacker's shot reportedly hitting Trump's ear, he escaped the Pennsylvania rally with minor injuries and a roar of support from the crowd in seeing Trump raise a defiant fist in the air as he was taken to safety by security. The news has not had any influence on the currency markets, with GBP/USD remaining at elevated 12-month highs and USD/EUR also at a 6-week low, highlighting the US dollar's weakness at present. However, the event may add to the ongoing 'polarisation' of the US electorate, which is defined as the extent to which someone feels more negatively towards other political parties. Dollar weakness has been driven more recently by slower US GDP growth coupled with the latest CPI Inflation data, which was released in the US Last Thursday. The data showed that price rises fell faster than expected in June to just 3%, below forecasts of 3.1% and May's reading of 3.3%. The news also saw bets on interest rate cuts increase for this year and the dollar fall 0.6% against a basket of currencies in the immediate aftermath of the release. The next Federal Reserve rate decision will take place on Wednesday, 31st July. There is not expected to be an interest rate cut, however expectations for September cut are currently standing at 95%. Markets will be looking at July's accompanying commentary closely for further insights on what to expect later in the year. 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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