Market Report - 12/10/2023
UK economy returns to growth in August
Following the highly anticipated UK GDP growth data for August, I thought a brief update would be useful. The UK economy returned to growth in August, as activity picked up after a worse-than-expected slump in July.
GDP rose by 0.2% in August, the Office for National Statistics reports, which matched City expectations. The services sector grew by 0.4% in August, but there was a contraction in the production and construction sector. However, the GDP report for July has been revised down to show a fall of 0.6%, worse than the 0.5% first estimated.
Although the UK has returned to growth, the economy is still weak, warns Suren Thiru, economics director at ICAEW. Thiru says high interest rates are hurting growth, the UK economy will remain “uncomfortably close to recession” in 2024. She continued to say “this disappointingly weak return to growth points to an economy fraying at the edges as inflation and higher interest rates hinder businesses and consumers.
August’s GDP increase largely reflected the reversal of the squeeze on July’s activity in services from poor weather and strike action. “With inflation, higher taxes and the lagged impact of previous interest rate rises weighing heavily on consumer demand and business activity, the UK is likely to remain uncomfortably close to recession well into next year. These underwhelming GDP figures provide further evidence that higher borrowing costs are hurting the economy, making an interest rate rise in November less likely.” Looking at the reaction of the FX markets to this data, GBP looks to defend a run of small daily gains against the Euro and a more pronounced short-term rebound against the Dollar. Further assistance may also be found during the release of GDP data if it confirms a sharp rebound in activity during August.
In terms of the Euro, GBP/EUR rate was trading 1.1582 following the release of the data with hopes from sterling bulls that the pair can breach resistance levels just under 1.16.
GBP/USD rose above 1.2300 for the first time since September 22nd on Wednesday but struggled to gather further bullish momentum. The negative shift seen in risk sentiment could limit the pair's upside in the near term but the US Dollar (USD) could have a hard time preserving its strength in the event policymakers deliver dovish remarks. Despite the relatively mixed bag of UK data seen this morning, GBP/USD still trades quite comfortably above 1.23, with this afternoons US CPI release and unemployment claims in the limelight to establish fresh impetus.
EUR/USD is trading above 1.06, attracting some buying during the Asian trading session on Thursday. Dovish Fed expectations keep the US Dollar bulls on the defensive and lend support to the pair. Traders seem reluctant to place aggressive bets ahead of the US consumer inflation report.