Sterling Update: UK Economy Rebounding?

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

GBP

The latest GDP growth data for the UK was released this morning. It shows that the UK economy grew 0.1% in February and 0.3% in January (revised up from the 0.2% reported previously), which could indicate the UK economy is rebounding from its technical recession.

While the data aligned with forecasts, it’s worth noting that both the manufacturing and services industries reported growth that exceeded expectations. This positive performance has led some economists to speculate that the UK’s growth for the first quarter of this year could surpass the 0.1% initially projected by the Bank of England.

The positive growth data could also give the Bank of England more flexibility and time on its path towards rate cuts this year.

Rate cuts are still looking likely in the UK this year, as CPI data continues to show that inflation is slowing. The most recent UK CPI reading printed below expectation at 3.4%.

The BoE’s forecasts also show inflation dropping below 2% in the Spring before climbing again in the summer months, so growth data could impact policymakers’ decisions more than slowing inflation.

MPC members Breeden and Greene also spoke on various panel discussions this week, with Megan Greene, one of the more hawkish members of the Bank of England, touching on the possibility of rate cuts. She said in a Financial Times column published on Thursday: “In my view, rate cuts in the UK should still be a way off”. Markets expectations for the first rate cut have now moved from August to September and the number of quarter point cuts forecast for the year is down to two.

EUR

Yesterday, the European Central Bank maintained its rates for the fifth consecutive meeting but appeared to hint at a potential rate cut in June. The ECB President, Christine Lagarde, stated, “It would be appropriate to reduce the current level of monetary policy restriction” if inflation continues to move toward its 2% target.

She also nodded to the higher-than-expected CPI inflation data released in the US this week, saying, “We are not assuming that what happens in the euro area will be the mirror of what happens in the United States.” Her comments followed markets pushing back their forecasts for the first Fed interest rate cut after CPI data showed consumer prices increased by 3.5% from the previous year, ahead of the 3.4% expected.

Both the pound and the euro have weakened slightly, although this could be due to the strength of the dollar following the release of inflation data and increasing tensions in the Middle East.

Bloomberg also reported this week that Germany may avoid a recession despite economic growth declining by 0.3% in Q4 2023. Eurozone economies continued to show contraction in March, as German and French Composite PMIs both continued to print recently 50. However, if one of its strongest economies can avoid a technical recession, this could take some of the pressure off the ECB to cut rates as aggressively.

Disclaimer: This commentary does not constitute financial advice.