Not this week, though, as the British pound exploded upward. It has recently hit record lows against the US dollar that we haven’t seen in almost three years. This implicit upward momentum occurs on the heels of positive domestic macroeconomic news, tempered by a clear and significant turn of the UK labor market. Bank of England Governor Andrew Bailey reassured markets that interest rates have peaked. Some of the changes in the labor market were due to raising employer National Insurance contributions, he said.
Our new Governor recently declared that the labor market was starting to soften. He explicitly associated this movement with the rise in employer NICs. This new development has alarmed many economists, as it will sap consumer spending and economic growth at a very critical juncture. UK inflation may eventually settle at its current levels, according to Megan Greene, a well-regarded economist. She cautions against expecting such a steep drop later this year.
Market analysts have been quick to react to these dramatic developments. They are now predicting a 63% probability of an interest rate cut coming as soon as August. If the market is correct, that would point to the dual pressures of an easing labor market and stagnating inflation expectations. Strong data on the UK economy has lifted sentiment among investors. A further sign of helpful business activity came last week, when June’s Purchasing Managers’ Index (PMI) bounced back shockingly. The composite PMI index rose to 50.7 against an expected 50.5 to a three-month high.
The PMI rebound points to only modest expansion, with forecasts currently calling for GDP growth of 0.1% to 0.3%. Compared to what the first quarter was able to pull off, analysts are getting ready for an extreme deceleration. Recent signs point toward a brighter picture. The slowdown we’ve been waiting for raises questions about how long this growth will continue.
Separately, geopolitical factors have moved the needle on market dynamics this week. The narrowing prospects of a ceasefire between Israel and Iran had further boosted risk assets with the continued support of sterling. Simultaneously, the Eurozone’s crisis response has made the safe-haven US dollar less attractive. This external factor has only served to fan the flames of the pound’s ascendancy.