Sterling soars as UK growth looks to be positive in Q2 2025 but August cut 'not set in stone'
Sterling has jumped towards its highest level in nearly three years on the US dollar this week, as the news of an Israel-Iran ceasefire boosts risk assets at the expense of the safe-haven greenback. Domestic macroeconomic news has also been positive for GBP so far this week.
Monday’s PMI data suggests that Britain’s economy rebounded in June, with the composite index rising to a three-month high 50.7 this month (from 50.3), just above the 50.5 estimate.
Growth looks likely to be positive in the second quarter, but a sharp slowdown relative to Q1 appears on the cards, with the PMIs pointing to nothing more than modest expansion, possibly in the 0.1-0.3% range.
Meanwhile, MPC members struck a largely dovish note during their appearance at the Lords Economic Affairs Committee on Tuesday.
Governor Bailey reiterated that the path for rates was downwards and that there had been a softening in the labour market, which he specifically ascribed (in part) to the hike to employer NICs - something that we warned about way back in the immediate aftermath of October’s budget.
Yet, there also appears to be a feeling among some officials (notably Megan Greene) that UK inflation could plateau at current levels, rather than fall sharply later in the year.
While an August cut remains the market’s base case (63% priced in), inflation fears ensure that one is far from set in stone.
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.
