The Pound sterling fell sharply on Friday after economic data showed UK business output contracted in November for the first time in more than a year. The figures also showed a larger-than-expected drop in retail sales for October.
The pound hit its lowest level against the US dollar since May, falling 0.56% to $1.2512. If economic data continues to show signs of weakness, the Bank of England may be forced to take more aggressive steps to cut interest rates.
beyond current market expectations.
On the other hand, the UK’s preliminary S&P Flash Composite Purchasing Managers’ Index (PMI) fell to 49.9 in November, below the 50.0 level that represents stability.
for the first time in 13 months, compared to 51.8 in October.
In this context, Sanjay Raja, chief economist at Deutsche Bank, pointed out that the PMI data represents a real test for the UK government’s budget.
especially in light of the impact of geopolitical actions on companies. In October, UK Finance Minister Rachel Reeves announced higher taxes on corporations and the wealthy.
Raja explained that there is increasing pressure on employment plans.
as data from the manufacturing and services sectors showed a decline in employment plans.
while input prices, especially in the services sector, have begun to consolidate due to the impact of the new taxes. He added that the main challenge for policymakers is to assess whether the inflationary impact of the tax increases outweighs the weak demand resulting from the slowing economy.
Regarding financial markets, UK government bond yields fell, while markets slightly raised their expectations for additional easing measures from the Bank of England. Other data showed that retail sales in the UK fell by 0.7% in October compared to September, a larger-than-expected decline and the sharpest decline since June.
UK economy faces recession, pressure: Impact on GBP
The UK economy is showing signs of recession after the UK government’s anti-business policies negatively affected economic activity. The pound has also come under severe pressure, as the UK Purchasing Managers’ Index (PMI) revealed a significant decline in economic performance. In its latest report, the survey indicated a sharp deterioration in market sentiment following the announcement of the October budget.
According to the S&P Global report, the UK Composite Purchasing Managers’ Index (PMI) fell to 49.9 in November, compared to 51.8 in October.
which contradicts expectations that the figure would remain stable. The manufacturing sector has also entered a contraction phase, as the PMI fell to 48.6 from 49.9, reflecting the global slowdown in this sector, which the UK is difficult to avoid.
The services sector, the most important sector in the British economy, has begun to suffer from increasing pressures.
as the purchasing managers’ index fell to 50, down from 52 in the previous month, indicating a clear slowdown in economic activity. Companies in the United Kingdom reported a marked decline in confidence as a result of the recent budget.
In a comment, Chris Williamson, chief economist at S&P Global Market Intelligence, said: “The first survey after the budget is worrying.
as companies reported a decline in output for the first time in more than a year, while employment levels fell for the second month in a row.” He added that inflationary pressures on companies are increasing again, as the number of workers begins to decline.
For his part, Sanjay Raja, chief economist at Deutsche Bank in the United Kingdom, confirmed that pressures on employment plans are increasing, as both the manufacturing and services sectors saw a decline in future employment plans.
Pound sterling Forecast 2025: Market Analysis and Trends
In a tough scenario for the Bank of England, the bank is likely to cut interest rates if signs of weakness in the labor market emerge. However, the bank will face challenges due to the possibility of inflation rising again, which will limit its movements.
In the currency markets, the GBP/EUR pair witnessed significant movements, rising to 1.2094 after the release of weak economic data from the Eurozone.
before falling back to 1.2020 after the UK data. As for the GBP/USD, it was subjected to strong pressure, falling to record levels at 1.2512.
as a result of the continued strong growth in the US economy.
which is expected to achieve further expansion in the future with growth-oriented economic policies.
In contrast, in the UK, companies are facing significant challenges due to huge tax increases.
raising the minimum wage, and amendments to labor laws.
which negatively affect the economy and increase pressure on the pound. In this context, expert Williamson pointed out that business confidence has fallen sharply since the general election.
recording its lowest levels since late 2022.
According to the investment bank’s forecasts, the GBP/USD pair is expected to witness a significant rise by the end of 2024 and 2025.
reflecting market trends in the coming period. However, the political and economic conditions in the Eurozone may contribute to supporting the pound for a longer period.
creating a balance between negative and positive movements.
After the release of the latest economic data, financial markets showed that investors’ expectations for interest rate cuts from the Bank of England have increased.
as expectations were revised from two to three cuts by 25 basis points in the next twelve months. Although the probability of a rate cut in December remains low, expectations indicate a rate cut in February 2025.
