The gloomy UK economic outlook has been a thorn in the pound’s side lately. That pain eased slightly on Wednesday morning by official data showing the UK economy grew unexpectedly in May.
The Office for National Statistics showed that economic output expanded by 0.5% in May, although consumer services fell amid inflation that hit shoppers.
A weaker dollar also helped the pound to edge back into the 1.19 range against the US currency, having hit a two-year low the previous day.
Despite the unexpected growth in May, the pound’s gains were tethered by other indicators, signalling weak economic momentum domestically. These conditions make it difficult for the Bank of England to tackle inflation without damaging the economy.
As the Conservative Party leadership race heats up, investors are digesting candidates’ pledges to cut taxes to get the economy growing again. Meanwhile, former chancellor – and bookies favourite – Rishi Sunak said he wants to tame inflation first.
On Tuesday, Bank of England governor Andrew Bailey pledged to bring inflation down to the central bank’s 2% target.
At a meeting organised by OMFIF, a central banking think-tank, Bailey said that he would be quite simple about the matter, stating that he thought “overwhelmingly the most important demonstration of Bank of England independence” is to return inflation to target. This task represents the most significant test of the system.
US inflation jumps to fresh 40-year high
The dollar slipped lower on Wednesday morning ahead of data indicating US inflation at a 40-year high.
Investors were acutely aware that a higher-than-forecast consumer price reading would stoke expectations of aggressive Federal Reserve interest rate hikes to restore price stability and push the dollar higher – that’s exactly what happened.
According to figures released by the US Department of Labour Statistics, US inflation data accelerated past economists’ expectations to hit 9.1% in June. This fresh 40-year high reinforces expectations of another significant 0.75 percentage point Fed rate hike this month.
The dollar surged after the consumer price data, eroding the pound’s moderate gains, which fell back into the 1.18 range.
The Royal Institution of Chartered Surveyors housing price balance survey releases overnight on Wednesday in the UK.
Initial jobless claims for the week ended 8 July and the producer price index (PPI) for June hit the headlines in the US on Thursday. The market will closely monitor changes in the PPI for commodity inflation.
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