Sterling Update: Strong recovery for UK economy

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

GBP

Sterling saw a strong recovery last week amidst confirmation that the UK economy is recovering well after both its brief and shallow recession at the end of last year. Following the release of the UK’s GDP growth data for the second quarter last week, which came in at 0.6% and following a similar trend to Q1 (0.7%), the pound rallied against a basket of currencies, including the dollar and the euro.

The New Zealand and Australian dollar were also impacted by the pound’s strength. On top of the positive date to come out of the UK, the Reserve Bank of New Zealand also cut interest rates again last Wednesday to 5.25%. Since then, the GBP/NZD has seen another resurgence to near multi-year highs, with the Australian dollar also losing ground against the pound. Most of the volatility last week could be down to the pound, following the latest release of the UK’s CPI inflation data released on Wednesday.. Inflation in the services industry, historically the stickiest industry to reduce inflationary pressures, is now starting to see a continued downward trend. The expectations for a further Bank of England interest cut at the next Monetary Policy Committee meeting on 19th September crept up to 44% following the release of the CPI inflation data, however, had dropped back down to around 33% on Monday.

This perspective was further supported by Ruth Gregory, deputy chief UK economist at Capital Economics, who commented: “The further easing in wage growth will be welcomed by the Bank of England as a sign that labour-market conditions are continuing to cool. This lends some support to our forecast that the Bank of England will press ahead with two more 25 basis point interest rate cuts later this year.” Considering that the MPC was divided with a 5/4 split in favour of the UK’s first interest rate cut a few weeks ago, there may be significant market uncertainty surrounding the decision next month, which could see the pound weaken in the lead-up to the announcement if another cut is forecast with any increasing probability.

The Bank of England’s Governor, Andrew Bailey, is also due to speak this evening at the Jackson Hole Economic Policy Symposium in Wyoming.

EUR

The euro hit a new year-to-date high against the dollar this on Monday. Last week’s better-than-expected retail sales data in the US saw the greenback make some significant inroads against the single currency, with EUR/USD coming down from an 8-month high that represented the best time to buy dollars since the end of last year. However, following the data release, we saw significant selling pressure to bring the pairing down by almost a cent.

Market data is very quiet for the week ahead, with little due to take place outside of the Purchase Manager’s Index data released yesterday for the EU, as well as the UK and US. The services industry PMI data for the Eurozone came in above expectation at 53.3, against the expected reading of 51.7, whereas the PMI data for the manufacturing industry came close to expectation at 45.6 versus the 45.7 expected. The manufacturing reading remains below the key 50 threshold, which indicates the industry is still in contraction.

A significant factor in the rise of eurozone business activity in August was the renewed growth in France, where output reached its highest level in nearly 18 months. Conversely, Germany

experienced a downturn, with activity declining for the second consecutive month and at a faster rate. Meanwhile, the rest of the euro area continued to see an increase in output midway through the third quarter.

 

This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory.