UK economy to face steeper downturn than its European counterparts

[MongiIG]

That was the key takeaway from the Bank of England’s Andrew Bailey at the central bank conference in Portugal, alongside the determination to act more forcefully if needed to tame inflation.

 

 

Daniela Sabin Hathorn | Presenter and Analyst, London | Publication date: Thursday 30 June 2022 

 

UK economy facing uphill battle

The UK economy is heading to a steeper downturn than its European counterparts.

That is the key takeaway from Andrew Bailey's appearance at the European Central Bank's (ECB) Central Bank Conference in Portugal this week. The governor of the Bank of England (BoE) also said that the bank would act more forcefully if needed to tame inflation, and that seems to be the key theme we've seen this week.

The chair of the Federal Reserve (Fed), Jerome Powell, and Christine Lagarde, the president of the ECB, talked about that need to act more forcefully if inflation doesn't start to come under control soon.

GBP chart

Let's take a look now at a chart of the GBP to see how it is trading, because as you can see, not much of a reaction so far today in terms of the latest news.

Now, not only did we see Andrew Bailey's appearance yesterday, but we also had some key data out for the UK this morning. We have seen gross domestic product (GDP) for the first quarter (Q1) coming in, as expected, growing 0.8% in the first quarter. That's quarter-on-quarter with the year-on-year figure coming in at 8.7.

So the data pretty much online, not necessarily a bad reading, better than what we've seen in other economies like the US. So that has been potentially keeping the pound a little bit supported.

As we know that is old data that's measuring the first quarter that's not what we want to see. We want to see forward looking data. But all in all, it gives a better sentiment than expected as to what potentially we may see in the next few months.

GBP/USD

Now, if we are looking at the pound against the dollar, keeping in mind those comments from Bailey coming out yesterday, we did see the pound once again trapped in a descending trend with those bears in control.

Now, looking at what Bailey was saying, it's not really a surprise. We already know that the UK is in a bit of a sticky situation. We've seen house prices increase dramatically despite the figure this morning. The nationwide HPI data for June is actually showing a little bit of a decrease below expectations. So that potentially also helping the pound keep supported in terms of inflation expectations.

But nonetheless, Andrew Bailey's comments didn't really provide anything new for the market. We're already discounting that weakness in the pound in the UK economy. And the fact that he was mentioning 50 basis points at the July meeting really being on the table and a good likelihood that we may see those 50 basis points. Again, nothing new there. It's just a case of how markets are going to take that because on the one hand we do have people expecting those 50 basis points and wanting to see that in order to tame inflation. That seems to be the bank's key mandate at the moment.

But also we have people that fear that that may lead to a faster slowdown in the economy. So potentially that 50 basis points not seen as a good decision and actually a bit more bearish for the pound.

So it's going to be interesting in the next few weeks to see how that setup evolves as we see those comments from central bank members. But at the moment the pound pretty much stuck in that descending trend once again against the US dollar.

With those remarks from Bailey just adding a little bit more fuel to the fire of those fears about it for the session. Also fears about taming inflation and how the interest rate decision will happen in July.