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Britain’s economy delivered good news on Friday, especially for GBP/EUR. GDP grew by 0.4% in July, comfortably beating forecasts for no growth and extending June’s expansion. The UK also recorded the fastest growth in the G7 over the first half of the year. That helped the pound gain slightly on the euro at the end of the week, although it has been stable against both the euro and US dollar for the past month.
The rise in GDP gives the government something to celebrate ahead of a difficult Autumn Budget. For the Bank of England (BoE), things are less straightforward. A stronger economy makes higher interest rates easier to tolerate just as inflation is threatening to become troublesome again, a problem exacerbated by the oil price rising sharply again.
We will learn more this week. UK unemployment and earnings figures arrive tomorrow before Wednesday’s inflation report, with July’s annual rate having already climbed to 2.9%.
The Bank of England then announces its interest rate decision on Thursday. Holding rates remains the more likely outcome, but the chances of a hike have grown. Markets now see a meaningful possibility that policymakers could act this week, with tomorrow’s jobs figures and Wednesday’s inflation report still capable of shifting expectations.
Three policymakers already voted to raise rates at July’s meeting. Since then, the economy has performed better than expected and energy costs have climbed again. Oil prices jumped further this morning following fresh disruption in the Middle East, adding another complication to an inflation picture that was already becoming uncomfortable.
It all makes for an unusually important few days for sterling. The Federal Reserve also decides on interest rates on Wednesday, so the pound will have plenty of competition for investors’ attention. First up, however, comes tomorrow’s unemployment report before inflation and the Bank of England take over later in the week.
GBP: MPC vote takes centre stage
The surprise jump in British growth gave the pound a lift on Friday, but attention has already moved on from GDP. Sterling has started the week weakening against the US dollar but strengthening on the euro, powered by the likely effect of higher oil prices pushing through to general inflation. Tomorrow’s employment and earnings figures begin a rapid run of UK data before Wednesday’s inflation report and Thursday’s Bank of England decision. With energy costs climbing and the economy proving more resilient than expected, the MPC has an increasingly awkward balancing act.GBP/USD: the past year
EUR: Euro hands over the spotlight
After dominating last week, the euro begins this one with a little less to prove. The European Central Bank raised interest rates on Thursday as policymakers responded to higher inflation, but the single currency still lost some ground to the dollar before the weekend and slipped slightly against sterling. Various ECB policymakers will be speaking today, and then watch out for final eurozone inflation figures tomorrow and the ZEW Economic Sentiment Index.GBP/EUR: the past year
USD: Inflation strengthens the case
The dollar found support on Friday after American inflation proved stubborn once again. Consumer prices rose 0.4% in August, while underlying monthly inflation came in slightly higher than economists had expected. Markets responded by sharply increasing their bets on a Federal Reserve rate rise this week. The Fed takes centre stage on Wednesday. Until then, the dollar will be pulled between expectations for higher borrowing costs and the wider uncertainty created by the Middle East. Oil prices and today’s talks in Oman will be watched closely before policymakers in Washington have the final word.USD/GBP: the past year
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