The British Pound is losing against the dollar today after significantly weaker GDP data for the month of July and a decline in industrial production. Today's GDP data showed a decrease of 0.5% on a monthly basis, which was simultaneously the largest decline since December 2022. It is worth noting that all sectors of the economy were in the contraction zone. The service sector, which contributed to the largest decline, was surprising, especially because the drop occured during a period when tourism should be growing.
The Bank of England (BoE) currently finds itself in a difficult situation. On one hand, the economy is already sending signals of a slowdown due to high interest rates, and on the other, the average earnings index including bonuses has increased from 8.4% to 8.5%. Higher wages put an additional inflationary pressure, despite the fact that inflation remains high, which advocates for a continuation of rate hikes. The consensus currently predicts a further increase of 25 basis points at the meeting on September 21st next week.
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The weakening of the Pound against the USD following the publication of macro data indicates that the market is beginning to price in a higher probability of the BoE abstaining from hikes. Even higher interest rates could indeed lead the UK into a deeper recession. The business sector is already calling for a halt to increases in the face of the difficult economic situation. Source: xStation 5
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