The pound tumbled against the dollar on Friday after eagerly awaited growth data showed Britain’s economy contracted in June – but by less than feared.
The Office for National Statistics (ONS) said gross domestic product (GDP) dropped by 0.6% in June – the most significant contraction in 17 months but not as steep as the 1.3% fall forecast by economists.
The figures compiled by the ONS also showed the economy contracted by 0.1% between April and June, compared with forecasts for a 0.3% drop. When comparing second-quarter economic output against late 2019, Britain fell behind the US in its recovery from the pandemic.
Last week, the Bank of England predicted the domestic economy would enter a recession in the fourth quarter in the face of surging inflation – which it expects to exceed 13% in October – and rising interest rates.
With the economy starring down the barrel of a lengthy recession, the pound – which headed towards the 1.21 benchmark in the wake of the weak GDP data – is expected to slip below 1.20 soon, according to market analysts. The US, on the other hand, is moving away from talk of a recession following unexpectedly firm nonfarm job figures last week.
Dollar firms as investors reassess Fed rate hike bets
The dollar was supported on Friday by the hawkish tone of US Federal Reserve officials, tempering expectations that this week’s US inflation numbers could persuade the central bank to ease policy tightening.
The lower-than-expected inflation data dented the safe-haven dollar as investors took it as a sign the Fed could be less aggressive with rate hikes with prices reaching their peak.
Speaking on Thursday, San Francisco Federal Reserve Bank President Mary Daly said: “I still think 50 basis points is the case, but I am open to 75 should the data evolve differently.”
“We don’t want financial conditions to relax,” Daly added, noting that she considers borrowing costs for businesses and consumers as well mortgage rates to gauge financial conditions. “I really do want those to remain tight and tight and tightening as we go.”
Looking ahead
Wednesday’s UK consumer price index is the most anticipated economic release next week. Prices in the UK rose by 9.4% in the year to June 2022, with economists expecting inflation to have accelerated a further 0.4% to 9.9% in July – ramping up the pressure on the BoE to tame inflation.
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