Cable continued lower last week amid a stronger dollar, as investors remain nervous about UK data. The hope among bulls is that the British economy will expand, providing enough fiscal room to prevent significant tax hikes. The case for the bears is simply that the current outlook is maintained, forcing the BOE to keep rates elevated.
Two significant elements that could determine the direction of the currency pair are scheduled for this week. First is Tuesday’s release of jobs data, which is important for the BOE’s policy outlook. But the main event could be the release of the monthly GDP figures on Thursday, as that is important for determining how much fiscal headroom will be available next year.
What the Market is Looking For
For Tuesday’s data, analysts’ consensus is that the UK inflation rate will remain unchanged at 4.7%. That is despite some fluctuations in the overall hiring patterns. The number of people claiming unemployment benefits is expected to decline slightly to 12.0K from 17.0K a month earlier.
Remember that in the claimant count case, a lower number indicates improvement. It means fewer people lost their jobs. The BOE has expressed concern on several occasions about growing “slack” in the labour market. That means people are not only losing their jobs but also being unable to be rehired. In turn, this reduces disposable income and consumer demand —the main factors currently propping up the UK economy.
Can the UK Eke Out Some Growth?
Attention then jumps to Thursday, where August GDP is expected to be reported at 0.1%, up from 0.0% in July. Meanwhile, manufacturing production is expected to decline by 0.1% compared to the +0.2% a month earlier.
The UK has recently beaten economic growth forecasts, largely thanks to resilient consumer demand. This has helped support the pound amid concerns that the UK government would face an income shortfall. Economists think that trend might be about to reverse, however. PMI figures for August were a disappointment, and since then, they have underperformed expectations. The concern is that UK consumers might be faltering, which could mean the economy slows substantially.
Are There Chances for a Rebound?
One of the problems the UK could be facing now is a self-fulfilling prophecy. Businesses and consumers are concerned about the economic outlook, so they naturally pull back on their spending. This, in turn, causes the economy to underperform. The main worry is that Chancellor Rachel Reeves will have such a large hole in the government’s finances that she will have to go back on her promise not to raise taxes.
Britain’s underperformance and labor-market slack are blamed on last year’s budget, which also raised taxes. Businesses are hesitant to invest if they won’t see a return on that investment or if they’ll see a reduced return due to higher tax costs. But if the economy outperforms expectations, the government might have enough revenue to avoid raising taxes. The resulting increase in performance among British assets would help bring back investor appetite and support the pound.
