Sterling Update: Officially out of recession

Here’s the latest currency news from our partner Moneycorp, to help you find out what your money is worth.

GBP

The most significant news in the UK last week was Rishi Sunak’s unexpected move to call a snap election on 4th July. Speculation that the election would happen in the autumn meant the announcement caught many by surprise, sparking a wave of curiosity about the underlying reasons.

The first potential answer could be related to the inflation data released the day before. Sunak pledged to halve inflation in the first year he came to power, a target he narrowly reached at the end of 2023. Although last week’s data came in higher than expected at 2.3%, CPI inflation is now as close to the target of 2% as it has been since July 2021. The Bank of England’s forecast that it would dip close to 2% before rising again, meaning that this could be the lowest it will get this year. The UK has also officially come out of the shallow recession the economy experienced at the end of last year.

With the economy’s growth now expected to slow, the timing of the election is crucial. With positive economic news close to election day, it allows the Conservatives to leverage their economic accomplishments campaign. It is particularly poignant as Labour’s policies have traditionally focused more on social equality than economic growth.

It also looks increasingly unlikely that the government will be able to offer any pre-election tax cuts. The International Monetary Fund has warned the UK government that it could be on course to miss its debt target and tax rises could be needed instead, which the Conservative party would be keen to avoid being held responsible for before the election is held.

Another critical contributor could be migration. Data has now confirmed that migration to the UK has peaked, with visa applications falling by a quarter across all key routes in the first four months of the year. Reducing migration has been a key pledge for the government, and this could form a central part of its campaign.

Despite the migration data and the positive economic news, polls indicate a potential historic defeat for the Conservatives against Labour. According to the BBC, 44% of the electoral population intend to vote Labour compared to 23% for Conservative, highlighting the uphill battle the Conservative party faces. The Conservative party is also experiencing a substantial pre-election exodus, with 135 MPs announcing they will not stand again as of 9am this morning. Last weekend, Rishi Sunak announced a National Service scheme for young people and a Triple Lock Pension Plus in a bid to attract potential Reform voters and the older generations back to the Conservatives.

This week has been fairly quiet on the data front, although we continued to see policy updates from all parties.

EUR

This week was fairly quiet, with German preliminary CPI inflation the only data release of potential impact released on Wednesday. Headline inflation in Germany came in at 2.4% year on year, up from 2.2% in April

However, markets have all but priced in a rate cut at the European Central Bank’s policy meeting next week, so it’s unlikely to have any significant repercussions on either market expectations or the euro.

When it meets next week, the ECB is projected to be the first major central bank to cut rates, which is expected to be the start of a change in monetary policy since accelerating inflation and subsequent interest rate rises led to the unprecedented run of tightening monetary policy that we’ve been seeing since Summer 2021.

 

None of the information contained in this article constitutes, nor should be construed as, financial advice.