Forex Trading Library

Can UK Data Drive the Pound Higher?

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The UK is set to deliver a trove of economic data over the coming days, including key figures such as GDP and jobs numbers. With many central banks approaching the point of calling it quits on the hikes, there are open questions about just how far the BOE will go. Some of the latest reports can give some clues.

There have been some positive developments for the UK economy over the last few days. Both the Confederation of British Industry (CBI) and KPMG have revised their economic forecasts upwards. The UK is expected to avoid a recession this year, but growth is still seen as generally meager at 0.4% for the whole year.

Comparables drive forex

The UK’s largest trade partner, the EU, recently slipped into technical recession due in large part to the same factors affecting the British isles: High energy costs, slowing consumer demand from inflation, slowing trade. If the EU continues to underperform, it might be no surprise that the UK is also dragged down.

However, GDP growth typically supports the currency. With the BOE worried about inflation, the economic growth leaves room to keep hiking. This could put the pound in a relatively advantageous position compared to other major currencies. The Fed is expected to skip a rate hike. The ECB is expected to hike, but there is slow economic growth. Japan sees solid growth, but BOJ insists on keeping the ultra-accommodative policy. Few countries have the combination of economic growth and expected policy tightening.

What does that data say?

Tomorrow the UK is expected to release key jobs data. This is important, because BOE Governor Andrew Bailey was the first central banker to acknowledge that inflation has gone on to “second-tier” effects. This is economics speak for saying that inflation is now affecting wages. The low unemployment rate in the UK is exacerbating cost pressures, which might mean the BOE will have to keep hiking for longer.

The May UK Claimant Count number is expected to more than half to 22K from 46.7K prior. The bigger the number, the worse it is for the UK economy. This represents the number of people who have lost jobs and are seeking unemployment benefits. A positive read shows the UK is losing jobs. Meanwhile the unemployment rate for April is expected to remain steady at 3.9%.

What about the economy?

April UK GDP is forecast to show growth of 0.2% compared to a -0.3% contraction in March. On an annual basis, this would boost GDP to 0.7% from 0.3% prior. Hardly stellar numbers. What could be more worrying for traders is that April industrial production is still expected to show negative annual growth at -0.8% compared to -1.3%.

The two factors to bring down inflation are shrinking the monetary supply (tightening policy), and increasing production. While the BOE has been working on doing the former, the latter remains elusive. This could mean that the BOE is forced to keep hiking for some time to come, and make it harder for the economy to lift off. In the meantime, however, it could keep supporting the pound.

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