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Brighton this summer: a busy July helped the British economy (cktravels.com / Shutterstock.com)
The British economy started the third quarter of the year with an unexpected burst of life. Gross Domestic Product (GDP) grew by 0.4% in July, comfortably beating forecasts for no growth and following another positive month in June.
That is a welcome surprise for a government preparing for a difficult Autumn Budget. It also complicates the picture for the Bank of England (BoE), putting interest rates at greater risk of rising. Good for the pound, but not great for your mortgage.
Sterling has indeed bounced higher on the news this morning, reversing a slowly declining week against the euro and US dollar, as higher American producer prices had given the dollar some support.
Bank of England policymakers might have expected underlying growth to slow sharply over the summer, but the economy is proving a little harder to knock off course.
The European Central Bank (ECB) raised interest rates by a quarter point yesterday as it tried to get on top of inflation caused by higher energy costs. Christine Lagarde described the unanimous decision as a “no-brainer”, while also stressing that the eurozone economy had been more resilient than officials expected.
Markets took that decision largely in their stride, but there is one more big hurdle before the weekend. US consumer inflation arrives this afternoon, with the Federal Reserve and Bank of England both meeting next week. Britain’s GDP surprise has changed the tone of Friday morning, but the interest rate debate on both sides of the Atlantic is far from settled.
GBP: Economy beats the pessimists
Sterling to euro had a sharp uptick this morning on the GDP news, with two successive months of higher growth than expected boosting the pound. However, the rest of the picture will be filled in next week, with unemployment, earnings and inflation, leading up to the Bank of England’s interest rate decision on Thursday, following the Fed on Wednesday. Recent betting was on the BoE holding and the Fed hiking, but will the Bank be able to hold out if the Fed hikes? And what impact will that have on sterling exchange rates? It’s a complicated picture.GBP/USD: the past year
EUR: Hike lands without fireworks
The euro got its rate rise, but not a dramatic boost. That was partly because Thursday’s decision had been so heavily signposted beforehand. The ECB also refused to promise another move, leaving future decisions dependent on what happens to inflation, energy prices and the wider economy. Along with this, inflation forecasts for 2027 and 2028 were revised higher, while growth expectations also improved. That leaves the ECB with an awkward balancing act.GBP/EUR: the past year
USD: Prices keep the Fed guessing
The dollar regained some ground against both the pound and euro on Thursday as another inflation signal showed prices rising fast. Producer prices rose 0.4% in August and were 5.4% higher than a year earlier, largely due to the latest energy shock. Coming up today is consumer inflation at 1.30pm. A hotter reading would add to the case for higher US interest rates ahead of next week’s Federal Reserve meeting and potentially strengthen the dollar, and vice versa. Either way, inflation remains the number markets will be watching most closely.USD/GBP: the past year
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