Pound sterling recorded its biggest weekly loss since last January, as it fell significantly during the European session on Friday, affected by weak economic data in the United Kingdom and the rise of the US dollar. This came at a time when expectations are increasing that the economic policies of US President-elect Donald Trump will push growth and inflation in the United States to higher levels.
According to the data, the British economy contracted unexpectedly in September, and growth slowed significantly during the third quarter of the year, which contributed to the pound falling to its lowest level since last May, reaching $ 1.2675. The pound is expected to witness a loss of about 2% this week, which is its biggest loss since the beginning of the year.
On the other hand, Trump indicated that he will impose high customs duties on imports from some of the United States’ most prominent trading partners, in addition to reducing taxes domestically and easing restrictions on several sectors such as energy and cryptocurrencies. These expectations may lead to higher inflation in the United States and boost domestic growth.
which made the dollar rise to its highest levels in about a year.
which contributed to eroding the gains of the pound against the dollar.
Unfortunately, the pound fell for the first time since July against the dollar by 0.4%. The pound had been rising for most of 2024 on expectations that UK interest rates will remain higher for longer than their US counterparts. With the US Federal Reserve increasingly likely to cut rates gradually, the dollar’s appeal is growing given the high inflation outlook and sustained growth in the US.
On the other hand, financial markets indicate that traders expect the BOE to cut interest rates to around 2% by December.
The impact of the UK economic slowdown on the pound
The value of the pound fell on the day the UK announced a sharp economic slowdown, with the pound falling against the euro and the US dollar. The GBP/EUR pair fell to 1.20, while the GBP/USD pair settled at 1.2660 after paring earlier gains.
The UK economy grew by just 0.1% in the third quarter of the year, which was below market expectations of 0.2% growth. This data showed a sharp decline in growth compared to the Bank of England’s forecasts in its November Monetary Policy Report, increasing concerns about the possibility of a recession in the UK.
As a result, market expectations have risen that the Bank of England will cut interest rates further in the coming months.
which explains the weakness in the pound. However, expectations indicate that the pace of cuts will be relatively slow compared to other major economies, which could provide some support to the pound. However, if the Bank decides to accelerate the pace of rate cuts, the pound could face further pressure.
While the outlook for inflation in the UK remains weak, recent data suggests that economic growth is likely to slow, which is rarely supportive of the local currency. The Office for National Statistics said UK GDP grew by just 0.1% in the three months to the end of September, below market expectations of 0.2%.
The disappointing figures come at a sensitive time for the new British government under Keir Starmer, which has seen negative messages about the economy in the past period.
In this context, many analysts believe that the Bank of England may be forced to cut interest rates at its December meeting, in an attempt to support the economy and ease pressure on the pound.
UK labor market deterioration: New data shows challenges
A new analysis from Deutsche Bank has warned that the UK labor market is gradually deteriorating, although it continues to show some resilience at the moment. According to Sanjay Raja, chief economist at Deutsche Bank, “cracks are beginning to appear in the labor market, although the situation has been relatively stable so far.”
According to the latest data from the Office for National Statistics, which showed an increase in the number of jobs by 220,000 in the three months to September, Raja points out that these figures do not fully reflect reality. A deeper analysis shows that the number of employees fell by 134,000 compared to the previous month (to 24 August).
and the number of redundancies rose to 90,000 in September, reflecting greater challenges in the labor market.
Raja stresses that the traditional unemployment indicator measured by the Office for National Statistics suffers from some shortcomings due to data collection methods.
and does not provide an accurate picture of the actual state of the labor market. Accordingly, many economists are turning to alternative data sources
which paint a more worrying picture of the state of the UK economy.
Alternative data shows a 24,000-job loss in employment in the first quarter of 2024, alongside a significant decline in salaries.
with the latest HMRC figures recording three consecutive months of salary contraction (down 42,000 between August and October). Job vacancies have also fallen sharply, by 14% compared to last year, reflecting a further slowdown in demand for labor.
In addition, Raja points out that the expected increase in employers’ National Insurance contributions will be one of the factors weighing on the labor market, which will be closely watched in the coming period. Following the government’s announcement of a hike in National Insurance for companies in the October Budget.
