The pound remains under pressure amid ongoing concerns about the UK economy.
Yesterday’s UK PMI figures – a forward-looking data set – disappointed with the combined numbers barely in growth territory at 51.0 (vs expected 51.9 and previous 52.0). Perhaps the biggest concern in the data was the sharp slowdown in hiring, with firms cutting jobs in response to the rising costs associated with April’s hike to business tax rates and the national minimum wage. Furthermore, UK retail sales figures out this morning have also fallen short of expectations (0.9% in June vs 1.2% estimates), albeit making a large rebound from the previous month’s abysmal numbers (-2.7% for May).
The fragile growth and labour market outlook presents a dilemma for the Bank of England. The big question is whether they will prioritise jobs or inflation. While a 0.25% cut remains extremely likely in August, there’s a reasonable chance that fears over the latter will limit the pace of easing beyond that.
As anticipated, the European Central Bank held interest rates on hold yesterday which is the first pause in over a year. However, President Lagarde delivered a more hawkish tone than expected in the accompanying press conference, highlighting stronger than expected economic performance and inflation progress. Therefore, the ECB is clearly in no rush to lower interest rates again, although it’s likely they’re keeping their options open and await further news on the trade talks and developments in the economy before potentially committing to another cut (i.e. wait-and-see mode).
Across the pond, US economy continues to appear remarkably resilient. Yesterday’s solid PMI figures point to sustained strength and businesses seem unfazed by lingering trade uncertainties. The big news of the week was the signing of a US-Japan trade deal and reports that the US and European Union are apparently close to reaching a framework trade agreement that will see a baseline tariff rate of 15%. By recent logic, the prospect of lower tariffs should be bullish for the greenback, but the USD has found gains hard to come by so far this week which is a bit of a surprise.
As a result, the GBP/EUR is down around 1-cent from this week’s high and hit a 3.5mth low (and close to the lowest since Oct 2023). The GBP/USD is down nearly 1% from yesterday and trades at the lowest levels since Monday. Next week, traders will continue to review the progress on trade negotiations and how the market react to this, along with the latest Federal Reserve interest rate meeting.
