Pound Surges on Strong UK GDP, USD Stabilizes Amid Fed Speculations, Euro Recovers Slightly.

  • UK GDP Growth Boosts Pound: The UK’s GDP rose by 0.4% in May, doubling expectations and reducing the likelihood of an August 1 interest rate cut, boosting the Pound to a one-month high against the Euro and a four-month high against the Dollar.
  • Services Sector Drives Growth: The services sector, the largest in the UK economy, grew by 0.3% in May 2024, contributing to a 0.9% GDP growth over three months, indicating a robust economic recovery and reducing the need for Bank of England intervention.
  • Bank of England’s Rate Cut Timing Uncertain: Despite strong GDP growth, economists debate the timing of an interest rate cut, with some predicting a delay until September due to persistent services inflation and upcoming economic data releases.
  • US Economy Shows Signs of Stability: Fed Governor Lisa Cook expressed optimism about the US economy, noting significant inflation reduction and a strong, albeit cooled, labor market. The US Dollar stabilized following Federal Reserve Chair Jerome Powell’s testimony on maintaining high interest rates until inflation targets are met.
  • Euro Gains Amid Fed Speculations: The Euro regained some ground against the US Dollar as markets processed Powell’s testimony and anticipated further economic data. Investors remain cautious, awaiting US and German inflation reports, which are expected to show a slight deceleration.

GBP: The Pound Sterling experienced a significant rise after the UK’s GDP growth in May exceeded expectations, reducing the likelihood of an interest rate cut on August 1. The Pound to Euro exchange rate climbed to a one-month high, while the Pound to Dollar exchange rate reached a four-month peak. The Office for National Statistics (ONS) reported a 0.4% month-on-month GDP increase in May, doubling the anticipated 0.2% growth and surpassing April’s stagnant 0% reading. This growth was primarily driven by the services sector, the largest in the UK economy, which saw a 0.3% increase in May 2024. Consequently, the UK economy expanded by 0.9% over the three months leading to May 2024, compared to the preceding three months, propelled by a 1.1% rise in services output. These figures suggest a robust economic recovery in the UK, decreasing the necessity for the Bank of England to consider an interest rate cut.

“The key question for the Monetary Policy Committee (MPC) is whether they can justify a rate cut in August with potential consecutive quarterly growth rates of 0.7%,” stated Rob Wood, Chief UK Economist at Pantheon Macroeconomics. The strong performance in the services sector implies persistent inflation within this segment. Huw Pill, the Bank of England’s Chief Economist, emphasized vigilance regarding services inflation, noting that while interest rates would eventually decrease, the timing remained uncertain. Following Pill’s remarks, the Pound strengthened as investors reduced the probability of an August 1 rate cut at the Bank of England to below 50%. These positive GDP figures are further delaying rate cut expectations, bolstering the Pound’s exchange rates.

“Rate-setters appear eager to ease policy and mentioned during their June meeting minutes that they were not concerned about stronger-than-expected growth. However, this latest growth surprise supports our view that the MPC will postpone reducing the Bank Rate until September,” added Wood. May marked the fourth GDP increase in five months. Ashley Webb, UK Economist at Capital Economics, noted this trend indicates that the negative impacts of higher interest rates and inflation are diminishing. Capital Economics now forecasts a 0.7% quarter-on-quarter GDP increase for Q2, mirroring Q1 and surpassing the Bank of England’s predictions. “This marginally reduces the urgency for the Bank to cut interest rates,” Webb remarked. Nonetheless, Capital Economics anticipates a rate cut on August 1, with the timing heavily dependent on upcoming June inflation and May labor market data.

USD: In Australia, Fed Governor Lisa Cook expressed optimism about the US economy’s prospects, indicating that current data suggests a “soft landing.” She highlighted significant reductions in inflation from peak levels and a labor market that, although cooled, remains strong. Cook noted that the job vacancies to unemployment ratio has returned to pre-pandemic levels, and fewer workers are voluntarily quitting, signifying reduced confidence in finding better employment opportunities. “My baseline forecast, aligned with many external observers, is that inflation will continue to move towards the target over time without significant increases in unemployment,” Cook said. She emphasized the Fed’s responsiveness to potential changes in the unemployment rate. The US Dollar (USD) managed to recover some losses on Wednesday as markets processed Federal Reserve Chair Jerome Powell’s recent testimony. Powell reiterated the Fed’s data-driven approach to monetary policy, maintaining high interest rates until greater confidence in achieving the 2% inflation target is established. His comments allowed the Greenback to remain stable during Wednesday’s European session.

EUR: The Euro regained some ground against the US Dollar in Asia and Europe on Wednesday as investors considered Powell’s previous Congressional testimony and anticipated his second session on Capitol Hill. Powell’s remarks, which were largely expected, provided a slight boost to the Dollar. He reiterated the need for more data to justify an interest rate cut this year, with hopes that prices are moving in the right direction. The prevailing market view remains that a rate increase is unlikely, and the Fed may begin cautiously lowering US borrowing costs by September if inflation trends allow. However, this expectation was in place before Powell’s comments. EUR/USD is expected to trade within a narrow range until Thursday, when official US consumer price data and German inflation figures are released. Economists predict a slight deceleration in annualized US inflation to 3.1% in June from 3.3% in May, with the core rate remaining steady at 3.4%, still above the Fed’s target but on a downward trend. Germany’s final June inflation rate is anticipated to drop to 2.2% from 2.4%. Although Powell’s second day of testimony typically has less immediate market impact, investors may remain cautious until he concludes speaking.

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.