UK economy: Where is it headed?

Fundamental snapshot

The fundamental situation of the United Kingdom can be characterised as indifferent improvement meaning that improvement is likely at levels expected by the Bank of England.

• The Bank of England's Monetary Policy Committee (MPC) voted to increase the Bank Rate by 0.25 percentage points to 4.50% on the 11th of March and will meet again on the 22nd of June.

• The Monetary Policy Committee‘s May statement contained cautious sentiments with regards to the approach to monetary policy.

• The outlook for growth remains uncertain, but it can be characterised as optimistic improvement. The Q1 2023 final report is due on Friday the 30th of June

• The outlook for CPI can be characterised as a pessimistic improvement. The May report is due on Wednesday the 21st of June.

• The outlook for unemployment can be characterised as a slightly indifferent deterioration. The April report is due on Tuesday the 13th of June.

• The war is having a detrimental effect on the global and UK economy by causing higher energy prices, supply chain disruptions, financial market volatility, refugee crisis and geopolitical uncertainty.

• The UK's decision to leave the European Union (EU) has created a great deal of uncertainty about the future of the UK economy. This uncertainty has made investors less willing to take risks, which has led to a sell-off in risky assets, such as stocks and currencies.

• The UK cost of living crisis is having a negative effect on the value of the pound. This is because investors are becoming less confident in the UK economy and are therefore less willing to invest in British assets.

Previous three months (March to May)

Looking back at the previous three months shows that the pound has appreciated in value, having seen a low at 1.18 in early March before climbing to 1.26 in early May.

The upward trajectory can be attributed to a softer dollar as a result of the banking and debt ceiling crisis although as the sentiment towards these narratives improved, strength returned and the pair has more recently been retracing.

Month to date (June)

Looking at the month to date shows that the pound has appreciated in value, having seen a low at 1.23 in late May before climbing to 1.24 in early June.

The upward trajectory can be attributed to a softer dollar as a result of the resolution of the debt ceiling crisis as well as some indecision on whether the Fed will hike or not at the meeting later this month.

Outlook

The upcoming events to keep an eye on:

• June 2nd
  • US NFP to deteriorate to 193K from 253K.
  • Unemployment to slightly deteriorate to 3.5 from 3.4.
• June 9th
  • US Treasury Currency Report.

CME Group 30-Day Fed Fund futures

• June: rising sentiment of a hold, 60% in favour.

• July: steady sentiment of a hold, 50% in favour.

• September: rising sentiment of a hike, 40% in favour.

Long Term Value of the Pound Sterling to Steadily Appreciate: As the UK economy improves, investors are likely to return. Moves are expected to remain above the three month swing low of 1.18 unless inflation climbs or remains high.

Short Term Value of the Pound Sterling to Remain Steady: As the cost of living crisis continues to bite consumer’s spending power it is unlikely that any short term strength in the pound is to be seen. Moves are expected to remain below the month to date swing high of 1.24 unless the outlook for Fed hikes turns dovish.