June Review

The pound has been a star performer in 2023, and June was no different. GBP/USD peaked at 1.2848 and GBP/EUR at 1.1739, which seemed impossible just nine months ago.

On the face of it, many Brits may feel like patting themselves on the back over the rally on our good old sterling. Unfortunately, the basis for the currency strength may not be one that we want to shout about too much – uncontrolled inflation and spiralling interest rates, compared with the US and the EU.

And the cracks are beginning to show. First, the pound rallied to a 14-month high after market-implied expectations for future Bank of England rate hikes increased on the 14th of June before the UK's CPI Inflation data came in above forecasts. The tight labour market and significant wage increases reported in the previous week's unemployment data resulted in headline inflation sticking at 8.7%, and core inflation, which excludes volatile food and energy prices, rising 0.3% to 7.1%.

The Bank of England took decisive action in its rate meeting the following day, raising interest rates 0.5bps to 5%. The move was at odds with the market's prediction on the day, and Governor Bailey was forced to deny trying to trigger a recession in an attempt to cool inflation.

The pound spiked briefly against the dollar and the euro in the immediate aftermath but came back down quickly as the implications on the wider UK economy appeared to start impacting market sentiment, ahead of the positive effect of higher interest rates.

We finished the month with a significant loss of momentum from the pound.

 

July Outlook

The questions that we have going into July are aplenty:

Will the Fed raise rates again after their 'pause' in June?

The US Federal Reserve will release the meeting minutes from its last meeting on the 5th of July, which resulted in a distinctly hawkish pause. The minutes could give us some indication as to what to expect from its next meeting on the 26th of July, although the Fed has been signalling it will be watching economic data to steer its next decision. 

Will the GBP rally continue?

This is, of course, a complicated question. Although the UK's sticky inflation is causing the Bank of England to raise rates that have strengthened the currency, high-interest rates don't benefit a currency forever. 

At some point, ongoing high rates make future rate hikes less likely, as the end of the hiking cycle approaches while also signalling the potential for an economic slowdown or recession – as is the case in the UK at the moment. 

Either way, the pound is in the balance, and it’s already slipped around 1.5% since its high against the dollar before the last BoE meeting.

When will UK inflation start to flatten?

Forecasters continue to agree that inflation should come down in 2023, but it's not happening as quickly as we'd hoped. 

Although wholesale energy prices have fallen, it will take time to reflect on consumers' energy bills. The price of food and non-alcoholic beverages also began to ease in the year to May but still remains stubbornly high at 18.4%. The price of air travel costs, recreational and cultural goods and services, and second-hand cars are all still increasing. Predictions have started coming in, indicating we should expect headline inflation to come down a couple of pips, but that’s also what they said last time…

UK CPI inflation is released on Wednesday, the 19th of July.

Will the UK start creeping towards a recession?

Some analysts forecast that the recession the UK narrowly avoided in the early part of the year may come back to bite us much harder in the second half of this year. This month’s GDP figures for the UK might give us some insight into that theory. 

Signs are coming from multiple directions that the economic climate is starting to bite households. Data from the Office of National Statistics reports the UK now has the second-lowest savings ratio in the G7 group of wealthy nations, and Asda's income tracker estimates last week estimated that 40% of households are not earning enough to cover their expenses.

We'll get our next indication of the UK's potential for recession when GDP Growth data is released on Thursday, the 13th of July.

By the end of the month, we will know more and potentially have definitive answers in some cases. 

 

None of the information contained in this article constitutes, nor should be construed as, financial advice.

All data sourced from Bloomberg unless otherwise stated