Sterling saw limited movement on Friday, in what has been a quiet week for the currency. At the time of writing, GBP/USD was trading at 1.3070, up 0.10% on the day but hitting a fresh low.
UK economy saw a slight improvement in August, growing by 0.2% on a monthly basis, after a period of no growth in June and July. The results were in line with expectations, prompting a muted reaction from the pound. Sectors such as services, construction and manufacturing all performed positively, reflecting signs of continued growth in the economy. On an annual basis, GDP rose by 1%, up from a revised 0.9% in August, but still below market expectations of 1.4%.
The positive signals come at a good time for the government, which will release its Autumn Budget on October 30. The government is counting on the Bank of England to continue cutting interest rates to boost economic growth. Chancellor Rachel Reeves has stressed that “revitalizing the UK’s weak economy is top priority”.
In August, the Bank of England made its first rate cut of the new cycle, but took a neutral stance in September. The bank is scheduled to hold its next meeting on November 7, with the UK releasing inflation and employment data ahead of the meeting, which will likely determine whether policymakers feel comfortable with another quarter-point cut.
In the US, the week concludes with the Producer Price Index (PPI) for September, with the headline index expected to fall to 1.7% year-on-year, compared to 1.6% in August. However, the core rate is expected to rise to 2.7%, up from 2.4% in the previous month. With inflation largely outpacing it, the Fed’s primary focus has shifted from inflation to employment.
but any unexpected PPI reading could have a significant impact on US dollar.
GBP/USD moves after inflation data
After approaching the 1.3000 level early in the US trading session on Thursday, the GBP/USD pair managed to trim some of its daily losses thanks to the diverse economic data released from the US.
which limited the strength of the US dollar.
The US Bureau of Labor Statistics announced that the inflation rate, measured by the Consumer Price Index (CPI), slowed to 2.4% on an annual basis in September, compared to 2.5% in August. Additionally, the core CPI, which excludes volatile food and energy prices, rose by 3.3% on an annual basis, beating market expectations of 3.2%, while the monthly core CPI saw a 0.3% increase. Other data showed that initial jobless claims rose to 258,000 in the week ending October 5, compared to 225,000 in the previous week.
bringing concerns about a slowing labor market back to the forefront.
In the UK, the Office for National Statistics reported that GDP grew by 0.2% month-on-month in August, in line with analysts’ estimates. During the same period, industrial production and manufacturing output rose by 0.5% and 1.1% respectively, helping the pound maintain its strength against other currencies.
Before the end of the week, producer price inflation data for September will be released.
with investors expecting the monthly core PPI to rise by 0.2%, following a previous increase of 0.3% in August. If the data comes in below expectations, the GBP/USD pair could see a rise in the US session.
Thanks to the BOE’s cautious approach to cutting interest rates.
the pound has become the best performing major currency in 2024.
after cutting them only once in August. At 5.0%, it is the highest interest rate of the central bank in the G10.
ensuring that British assets such as bonds offer higher returns to international investors compared to other countries.
Sterling at risk of falling as inflation forecasts fall
The pound is at high risk of falling over the coming week, as UK inflation is forecast to fall below the 2.0% target. Economists point to the September CPI figures due to be released.
which are being attributed to the fall in global oil prices over the summer.
But for those who favor a strong pound, the news could pose another challenge.
as it could force the Bank of England to accelerate interest rate cuts. “Despite the recent sharp rise in oil prices, the previous fall in fuel prices is likely to lead to headline inflation falling to 1.8% y/y in September,” said Bruna Skarica, chief UK economist at Morgan Stanley.
The latest forecasts from the Bank of England’s Monetary Policy Committee, released in August.
show headline CPI inflation expected to come in at 2.10% in September. “Every relative decline is due to lower motor fuel prices,” notes Robert Wood, chief economist at Macroeconomics.
Global oil prices hit their lowest levels since 2021 in September but have started to recover.
meaning that pump fuel prices will remain rangebound. In related news, Corbyn released its updated investment bank consensus forecasts for the end of 2024 and 2025.
which showed a significant uptick in expectations for the GBP/EUR pair.
This external demand for UK assets is contributing to positive cash flows, boosting the value of sterling.
which traded at 1.20 against the euro and rose to 1.34 against the dollar. However, Bank of England Governor Andrew Bailey’s comments on October 3 that the bank could be “more aggressive” in cutting interest rates if needed have sent sterling tumbling.
