GBP: Key week for UK after strong GDP data

The week ahead is going to be relatively quiet regarding central bank speakers with the summer vacation period leaving the speaking calendar very light. Fed President Kashkari speaks tomorrow at 4pm BST – that’s it this week. 

After last week’s US inflation data, the key data releases this week will be in the UK. The jobs and wages data will be released today followed by the CPI data on Wednesday and the retail sales data on Friday. The heavy week of data releases follows on from the GDP data on Friday which was much stronger than expected and saw UK Gilt yields advance well ahead of yields in the US and core Europe. The pound weakened last week against the US dollar but was the next best performing G10 currency. 

The data was certainly good news although the 0.5% m/m increase in GDP in June reflected a surge in manufacturing that was partly distorted by working days relative to May when there was the extra bank holiday. But the Q/Q data was also stronger at 0.2% with strength in household spending, government spending and business investment. The 0.2% gain was also better than the 0.1% estimated by the BoE.

Still, it is worth adding that the UK remains the laggard within G7 as it remains the only economy to be still smaller than before covid hit in Q4 2019. But in the context of this week, it does mean that any upside surprises in the employment data today or of course in the CPI data on Wednesday will only reinforce further the likelihood of a BoE rate hike in September. 

The OFGEM energy price cap cut of 17% explains a lot of the -0.5% m/m consensus for CPI with the core rate only expected to slow 0.1ppt to 6.8% and with services CPI set to remain above 7.0%. The 3mth YoY wage data is also set to remain elevated (7.4% from 6.9%) but this partly is explained by weak March data dropping out of the calculation, so I will be looking to see whether the one-month data has slowed from last month to gauge the trend. 

The unemployment rate has now increased from 3.5% to 4.0% and any further rises would help reinforce expectations of slower wages ahead. I suspect the data this week might not show enough evidence of easing upside inflation risks deterring the BoE from hiking in September and in those circumstances following the stronger GDP data, we may well see some scope for further GBP strength. However, with the dollar also looking on a more solid footing, selling EUR/GBP may prove a better avenue for pound gains.

UK REAL GDP REMAINS BELOW THE PRE-COVID Q4 2019 LEVEL

 Source: Macro Bond & MUFG & Bloomberg

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