GBP/USD Flat as UK GDP a Mixed Bag

05/12/2023

2 minutes read

2023.05.12 10:43

UK GDP remains steady at 1% in Q4
BoE raises rates by 25 bp
BoE revises upwards its growth, inflation forecasts
UoM consumer sentiment expected to slow

is trading at 1.2517 in Europe, almost unchanged.

In the UK, declined by 0.3% in March m/m, below the 0.1% estimate and the February reading of 0.0%. Still, the economy managed to gain 0.1% in the first quarter, unchanged from Q4 2022 and matching the estimate.

BoE raises rates by 25 bp, revises inflation, GDP forecasts

There was no surprise as the Bank of England raised rates by 25 basis points, bringing the cash rate to 4.50%, its highest since 2008. This marked the twelfth consecutive hike in the current rate-tightening cycle, underscoring the BoE’s pledge to curb hot inflation. Governor Bailey said after the rate announcement that Bank would “stay the course to make sure that inflation falls all the way back to the 2% target”.

Nobody is expecting that the road to 2% will be easy, with inflation currently in double digits. The BoE remains optimistic that inflation will fall rapidly during the year and will fall to 5% by the end of the year. In February, the BOE predicted 4% inflation by the end of the year. This seems like a tall order but is certainly possible if the rate hikes make themselves felt and cool the economy.

There have been constant concerns that the BoE’s aggressive rate policy would lead to a recession, and six months ago, the BoE had projected a recession. Bailey reversed course yesterday, saying that the drop in energy prices and stronger economic growth meant that GDP would expand by a weak 0.25% in 2023, versus the 0.5% contraction in the previous forecast.

In the US, the economy is showing signs of cooling, and high-interest rates are expected to dampen the robust labor market. Unemployment claims surprised on the upside on Thursday, rising from 245,000 to 264,000, well above the estimate of 242,000. This is just one weekly report, but it’s sure to raise speculation that the labor market is showing cracks.

The US wraps up the week with UoM Consumer Confidence, which is pointing to a rather sour US consumer. The indicator fell to 63.5 in April and is expected to ease to 63.0 in May. Weak consumer confidence can translate into a decrease in consumer spending, a key driver of economic growth.

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