UK Inflation Slows, Germany’s Economic Outlook Worsens, and the Pound Takes a Hit.

• UK Inflation: Headline inflation (CPI) rose by 2.2% in July 2024, slightly above June’s 2.0%, but core inflation fell to 3.3%, below expectations.
• Key Drivers: Housing and household services contributed most to the CPI increase, while falling hotel prices exerted downward pressure.
• Interest Rate Outlook: There’s a 45% chance of a 25 basis point rate cut by the Bank of England in September, with a total 50 basis points cut expected by year-end.
• Germany’s Economic Concerns: The ZEW survey indicates the sharpest decline in Germany’s economic expectations in two years, driven by global uncertainties.
• Currency Impact: The pound weakened against the dollar after UK inflation data missed forecasts, with traders anticipating further rate cuts from the Bank of England.

GBP: UK headline inflation (CPI) inched up in July, but not as much as anticipated. CPI increased by 2.2% over the 12 months to July 2024, slightly up from 2.0% in June. On a monthly basis, CPI dropped by 0.2% in July 2024, compared to a larger decline of 0.4% in July 2023. Core inflation also eased, slipping from 3.5% to 3.3%, falling short of the expected 3.4%. According to the ONS, the primary factor driving the rise in both the CPIH and CPI annual rates was housing and household services, where gas and electricity prices fell less than last year. The most significant downward pressure came from restaurants and hotels, where hotel prices fell this year after rising last year. The closely watched CPI all services index rose by 5.2% in July, down from 5.7% in June and 7.4% in July 2023. Current UK rate expectations show a 45% chance of a second 25 basis point interest rate cut at the Bank of England’s September 19th meeting, with a total cut of 50 basis points anticipated by year-end.

EUR: Germany’s economic outlook is deteriorating, according to the latest ZEW survey, which revealed the sharpest decline in economic expectations in two years. The report suggests that ongoing uncertainty is heavily influencing economic forecasts, driven by unclear monetary policy, disappointing business data from the US, and rising fears of escalating conflict in the Middle East. ZEW President Professor Achim Wambach, PhD, commented that this uncertainty has recently manifested in international stock market turmoil.

USD: The pound weakened against the dollar following the release of UK inflation data, which fell short of forecasts. The Consumer Prices Index rose by 2.2% in July, following two consecutive months of 2% gains. Economists had predicted a 2.3% increase. For the first time since August 5, traders fully priced in a half-point of further Bank of England rate cuts by the end of the year. With US inflation data due out this afternoon, all eyes will be on it to determine the short-term direction of the currency pair. As the Federal Reserve is expected to implement a rate cut in about a month, every piece of macroeconomic data is being closely monitored for clues on future market movements.