By Matthew Boyle
GBP rates have fallen this morning across the board as a release of GDP data shows a significant slowdown in July. Figures showed a fall in GDP by -0.5%, far greater than the -0.2% expected. This figure erodes much of the previous positive figures seen earlier this year, making yearly growth almost flat now and so raising concerns that the UK could be entering a period of stagflation – high inflation and falling growth.
It was the services sector that was the main source of the overall slowdown, slowing by 0.5% in July after growth of 0.2% in June. Whilst the strike action by NHS doctors and resulting appointment cancellations can be largely blamed for this, production output also fell in July by 0.7% after growth of 1.8% in June.
These poor figures combined with data yesterday that showed the rate of unemployment in the UK is gathering pace and now sits at the highest level in 2 years are serious cause for concern with many economists fearing with Stagflation apparent that a recession is around the corner.
Whilst the Bank of England meet later this month and are widely expected to raise rates for the final and now 15th time, the slowdown in GDP and inflation is exerting downward pressure on the Bond and yield markets – areas which help buoy the Pound and is one of main reasons exchange rates have remained high. While the BoE look to be coming to an end of their rate hike programme the ECB, having started theirs 6 months later, press on.
Consequently, we might expect this to encourage EUR strength in the coming months with the lure of increasing rates in bond and yield markets attracting foreign investment.
The ECB meet this Thursday for their rate announcement, and whilst previously it was thought they might not raise this month, reports suggest inflation may still be on the rise in Europe. A pricing back in of a hike will only increase downward pressure to GBP>EUR rates.
So as the BoE slow down, the ECB seem to be picking up pace. With UK recession lurking in the background this could result in a tipping point being reached where the recent near 12-month high rates plummet.
To add to these GBP woes as the recent heatwave and UK summer come to an end the autumn weather sets, and with it the need for people and businesses alike to turn their heating on and again feel the burn of high energy prices, further squeezing the UK economy.
So sadly it might be a question of “when” now rather than “if” tipping point will be reached and rates will fall.
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