Market Report - 13/07/2023
UK economy shrinks in May ; US Dollar weakens as bond yields fall
EUR/USD and GBP/USD have returned to trade at 16 month highs. This comes after US bond yields fell yesterday; which prompted a considerable sell off of the dollar.
Yesterday saw US CPI data reveal that inflation has cooled to 3% in June, taking the level to a 2 year low. The latest figures showed that June inflation had the smallest increase since March 2021, down from a four decade high of 9.1% in June 2022. As has been the case for some time now, the largest contributor to dropping inflation can be attributed to falling energy prices. This news yesterday saw EUR/USD rally significantly higher to 1.1145 a 16 month high.
The EUR/USD surged more than a hundred pips on Wednesday and, so far, is up by 300 pips from last week's level. Such a rally could warrant some consolidation or a correction; however, so far, no signs of the rally stalling are seen and risks remain tilted to the upside. The momentum remains positive, and more gains seem likely. The next resistance levels are seen at 1.1160 and 1.1185.
This morning the Office for National Statistics released May’s GDP report, where this year’s extra bank holiday (for King Charles’ Coronation) hit growth as per economists predictions.
The ONS reported that Britain’s economy shrank by 0.1% in May, with GDP falling at a slower pace than forecasted (City forecasters predicted a 0.3% fall). Economists feared that the extra bank holiday in May would hit activity alongside the continued squeeze from the cost-of-living crisis and public sector strikes (rail strikes, education and health sector services strikes were all cited by the ONS in their report).
Breaking down the data; the report showed that Production output fell by 0.6% in May, while the Construction sector fell by 0.2%. The services sector showed no growth in May and Consumer facing services also fell by 0.2%. The biggest contributors to the fall in consumer facing services in May came from food and beverage service activities, closely followed by buying/selling of real estate.
This small fall in the economy means that GDP remains only a fraction above where it was pre-pandemic, over three years ago now.
Following the news that the UK’s economy shrank in May, there are suggestions from City economists that the Bank of England will feel under pressure to keep raising interest rates, in turn putting even more pressure on the consumer.
Attention now turns to the US producer price data for June. This is expected to show a decline from a year ago, according to the median estimate of economists surveyed by Bloomberg. Alongside the PPI release.