Likely BoE rate cut and tax hikes cast 'gloomy pall' on Sterling
The sharp drop in payrolled employees in Britain in May has cast a gloomy pall on sterling and UK assets generally, as it suggests that employers are reacting badly to the latest round of tax increases. This means that Thursday's publication of the May/June employment data is critical, perhaps even more so than Wednesday’s inflation report, which is expected to show little change from the previous month. By Thursday afternoon this week we, and the Bank of England for that matter, should have a clearer view of the extent of weakness in UK economic data.
Last week’s dismal monthly GDP print for May was not at all an optimistic sign, as this almost guarantees that Britain’s economy contracted on a quarterly basis in the second quarter. Not only does this make an August rate cut from the Bank of England increasingly likely (almost 90% priced in by swap markets), but it also raises the risk of additional tax hikes in the autumn, which now seem practically inevitable. This is not a particularly appetising prospect for the pound, which has continued to underperform most of its G10 peers in the past week.
Author
Matthew Ryan, CFA
Ebury
Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.
