GBP: wet weather and strikes take UK economy down in July
Monthly GDP data show that the UK economy shrank by a greater than expected margin of 0.5%.
This causes a headache for the Bank of England as record increases in earnings could fuel a wage price spiral, which is often more caustic for an economy than ordinary consumer price inflation.
(Video Transcript)
The British economy
There's been wet weather and strikes contributing to a fall back in gross domestic product on a month-on-month basis in July here in the British economy. Gross domestic product falling by a margin of 0.5%. We've been looking for a drop of just 0.2% but the big moves coming as a result of people preferring to stay at home. And out of the wet weather, industrial production also down by a margin of 0.7% in July month-on-month.
The Bank of England
The big question is what does all this mean for the Bank of England on interest rates? Let's take a look at what's happened in terms of trade out of this because these are 15-minute candles for sterling against the US dollar. And you can see clearly here the point at which the data was released. There's been a little bit of a recovery in sterling since then. We're now half past eight so it's 90 minutes after the release of this data. Quick look at what's happening in terms of daily trade.
GBP/USD
You can quite clearly see here that we've got these new lower lows. That is now we have seen today the lowest print we've gotten GBP/USD since the 8th of June this year. And it's looking as though we were on a break the 200-day moving average which is the red line here at 124.32, just below where we are.
We haven't traded below that since March this year when we saw that small dip back there. So GBP on the way down, not just against the EUR as well, also on the way down.
The European Central Bank
Now bear in mind we've got the European Central Bank meeting on interest rates this week. It's widely expected we could well see a flat line in terms of where interest rates go. Possibly the European Central Bank leaving things on hold. The risk there is for them to raise rates by 25 basis points. Whichever way you cut it, sterling is down against the EUR/USD. The big question is now what's it mean for the Bank of England?
Bank of England interest rate decision
Well so far as the Bank of England is concerned, I think one eye definitely very much on what's happening with the consumer, very much what's going on in growth. But on the other hand we've seen record amounts of incremental increases in salaries. And this is going to be a real headache for the Bank of England.
It cannot afford to see a wage price spiral come out of all this which would be even more damaging to the economy. So best guess is at the moment as we await that Bank of England interest rate decision in eight days time. We could well see another quarter point rise come Thursday week.
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