UK avoids zero economic growth to alleviate recession concerns

Throughout the past week, the GBP/EUR exchange rate displayed a volatile pattern of trading. The UK managed to avoid a scenario of zero economic growth, which pleasantly surprised the market and alleviated concerns about a potential recession.

At the beginning of the week, the Pound (GBP) found some support due to heightened expectations of an interest rate hike by the Bank of England (BoE). Despite ongoing inflationary pressures in the UK, investors are optimistic about the likelihood of at least one more rate increase before the year concludes.

Nonetheless, the optimistic sentiment surrounding the economy began to waver as the week progressed. Retail sales figures fell short of expectations, revealing an unexpected slowdown in sales that underscored the financial pressure on consumers, exacerbated by rising borrowing costs.

In the middle of the week, the National Institute of Economic and Social Research (NIESR) issued a stark warning regarding the UK's economic situation. By referencing a combination of economic challenges reminiscent of the 1970s, the report indicated the possibility of a five-year period of stunted growth for the UK. As the only major advanced economy yet to recover to its pre-Covid economic levels, the UK may find itself trapped in a cycle of low growth, resulting in weakened demand.

As the week came to a close, the Pound managed to recover much of its previous losses following an unexpected expansion in economic activity reported by the Office for National Statistics (ONS). Both monthly and quarterly data showed modest growth, surprising observers as it had been widely anticipated that growth would stagnate in the second quarter of 2023.

Looking forward for the Pound (GBP), Tuesday will witness the release of the latest unemployment rate and wage growth figures. Projections indicate that unemployment will likely remain steady at 4% for the month of June, while wage growth is expected to have cooled on a monthly basis, dropping to 6.7%. Should both of these figures align with forecasts, the Pound could face downward pressure. The Bank of England considers wage growth a significant factor in inflationary pressures, and a slowdown could undermine expectations of further rate hikes.

Following this, Wednesday will feature the release of the most recent consumer price index data. Forecasts for July suggest that headline inflation in the UK may have decreased to 6.7%, while core inflation is projected to have cooled to 6.8%. Accurate reporting of these figures may weaken the GBP further, as it could signal a potential turning point in the trajectory of inflation.

Lastly, the retail sales data for July in the UK is scheduled for release on Friday. If this data surprises by surpassing expectations, it could contribute to a strengthening of the Pound.

EUR

Meanwhile, the Euro (EUR) underwent significant fluctuations over the course of the week, navigating through a volatile market environment. On Monday, the Euro faced downward pressure due to discouraging German data, which dampened overall market sentiment. A notable decline in industrial production in Germany limited the Euro's gains and maintained its vulnerable position.

As market sentiment deteriorated, the Euro found some modest strength as investors sought its safer haven qualities. However, its negative correlation with the US Dollar introduced further volatility as the latter exhibited uncertainty. Notably, the Euro experienced a marked surge in demand following the release of US inflation data that fell below expectations. This development tempered speculations of imminent rate hikes by the Federal Reserve, resulting in a weakening of the US Dollar.

Towards the end of the week, a stronger-than-anticipated increase in producer price inflation in the US prompted a resurgence of the aforementioned rate hike expectations. This led to a strengthening of the US Dollar and a subsequent decline in the value of the Euro.

In the upcoming week, the Euro will also be influenced by pertinent inflation data, with the Eurozone's headline Consumer Price Index (CPI)set to be released on Friday. Should the final reading confirm the 5.3% figure, the Euro might face a decline as expectations grow that the European Central Bank (ECB) could consider a pause in their policy adjustments at the September meeting.

USD

The beginning of the week saw the US Dollar (USD) navigating uncertain terrain, with a lack of substantial data contributing to fluctuations in the 'Greenback'. Analysts started to speculate that the Federal Reserve might soon implement a halt in their ongoing tightening cycle.

However, on Tuesday, the USD gained strength due to safe haven preferences, although the upswing was restrained by statements from Fed officials indicating that future policy decisions would be driven by data considerations.

Additional bearish comments from Fed representative Patrick Harker exerted more pressure, as he suggested that the current cycle had largely concluded and the Fed would now maintain elevated interest rates.

Following the release of the latest consumer price index data, the US Dollar initially weakened. The reported inflation figures in the US fell below expectations, prompting a reduction in expectations for imminent rate hikes. Yet, during the course of the trading session, the USD managed to regain ground, fueled by a more negative market sentiment.

On Friday, the US Dollar saw a slight uptick after the publication of June's Producer Price Index (PPI) data. The data exceeded forecasts, displaying a 0.3% monthly increase compared to the anticipated 0.2% rise. This outcome reinforced expectations for upcoming Fed rate hikes.

Looking ahead for the US Dollar (USD), the retail sales data for July is scheduled for release on Tuesday. If the expected 0.4% expansion aligns with forecasts, it could potentially lead to a strengthening of the USD.

Wednesday will feature the publication of the latest meeting minutes from the Federal Open Market Committee (FOMC). Depending on their stance, the USD might strengthen if a hawkish perspective is conveyed. Conversely, if the minutes hint at an imminent pause in policy adjustments, the Greenback could experience a decline.

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Data for the week ahead -

Monday

23.50 JPY Gross Domestic Product

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Tuesday

01.30 AUD RBA Meeting Minutes

02.00 CNY Industrial Production

02.00 CNY Retail Sales

06.00 GBP Claimant Count Change

06.00 GBP ILO Unemployment Rate

12.30 USD Retail Sales

12.30 CAD Consumer Price Index

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Wednesday

02.00 NZD Monetary Policy Statement

02.00 NZD RBNZ Interest Rate decision

06.00 GBP Consumer Price Index

09.00 EUR Gross Domestic Product

08.00 USD FOMC Minutes

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Thursday

01.30 AUD Employment Change

01.30 AUD Unemployment Rate

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Friday

06.00 GBP Retail Sales

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