HG MARKETS:

On Friday, June 28, the UK economy garnered attention following the recent decision by the Bank of England to leave interest rates unchanged. Finalized GDP numbers for Q1 revealed a more resilient-than-expected UK economy, with a growth rate of 0.7% quarter-on-quarter, up from a preliminary estimate of 0.6%.

According to the Office for National Statistics, the services sector’s output rose by 0.8% quarter-on-quarter, an improvement from the preliminary 0.7%. This marks the first increase in the services sector since Q1 2023. Household consumption saw a rise of 0.4%, up from an earlier estimate of 0.2%. Production increased by 0.6%, although this was a slight decline from the preliminary 0.8%, with manufacturing being the largest contributor. The construction sector contracted by 0.6%, which was better than the initially reported 0.9% contraction. Real household disposable income increased by 0.7%, consistent with Q4 2023 figures, while the household saving ratio rose from 10.2% in Q4 2023 to 11.1% in Q1 2024.

Despite these positive indicators, the UK economy had contracted in the previous two quarters and stalled in April 2024. The Bank of England maintained interest rates at 5.25% on Thursday, June 20, with a 7-2 vote. Concerns about inflation kept the BoE cautious. Wage growth and services inflation trends influenced the BoE’s rate path, and the finalized GDP report highlighted the services sector’s impact on the UK economy and inflation. A higher savings rate and steady disposable income may offer the BoE hope for a softer inflation outlook.

In response to the finalized UK Q1 GDP report, the GBP/USD experienced fluctuations. Prior to the report, the GBP/USD rose to a high of $1.26467 before dropping to $1.26216. After the report, it fell to a low of $1.26302 before rebounding to a high of $1.26355. By Friday, June 28, the GBP/USD was down 0.03% to $1.26353, reacting to the better-than-expected GDP numbers.

Later in the session, crucial US inflation numbers could signal a potential Fed rate cut in September. Economists forecast the Core PCE Price Index to rise 2.6% year-on-year in May, following a 2.8% increase in April. Softer-than-expected figures could bolster investor bets on a September Fed rate cut. However, personal income and spending trends also play a critical role; upward trends in these areas may drive demand-driven inflation, potentially keeping the Fed in a holding pattern for longer.

Investors should also keep an eye on FOMC member commentary, with Thomas Barkin and Michelle Bowman scheduled to speak. Their reactions to the inflation figures and views on the timing of a Fed rate cut will be closely watched by investors.