UK Jobs and GDP to Set the Stage for BOE

Investors are collecting the last bit of data before the BOE's rate decision next week, with growing doubts that a hike will ensue.

BOE’s Hiking Cycle Might Be Near Its End

The August poll of economists by Reuters showed a solid consensus that the BOE will add a 15 consecutive rate hike. However, the Governor of the BOE, Andrew Bailey, told Parliament recently that rates are near reaching the top. Investors are looking at the upcoming data to see if expectations for rate hikes could moderate in the lead-up to the September 21 interest rate decision. Expectations for a hike are now among the lowest in a couple of months, despite the UK public now anticipating prices to keep rising faster than before. Some analysts suggest that the next rate hike could be the last.

One of the main issues concerning the BOE as of late is that inflation pressures have gone on to affect wages, which are the second-round effects Governor Bailey has talked about. The persistently tight labour market in the UK is seen pushing up costs and making it difficult for the BOE to bring its hiking cycle to a close. The UK unemployment rate is expected to remain at 4.2%, with the claimant count dropping to 17.0K from 29.0K prior. This is despite the total number of jobs expected to decrease by 80K in the same month.

The Looming Recession That’s Still Due

The UK economy has escaped falling into a contraction despite numerous predictions over the last year. It's almost become a habit that UK GDP surprises to the upside. July GDP is expected to reverse its prior month's gains, falling -0.3% compared to the unexpectedly strong 0.5% in June. However, it's possible that previous months could be revised lower. The rolling 3-month average growth is expected to remain steady at 0.2%.

The UK is again expected to see a slowdown in manufacturing production by -1.2% in July, compared to a +2.4% expansion in June. Economists routinely point to the effects of strikes slowing production, but this indicator often surprises the upside and brings GDP figures above expectations. The stronger-than-expected economy contributes to the higher inflation, which would justify the BOE's rate hikes beyond September. But, if economists finally get it right, and the UK economy is moving towards contraction, then bets for another hike after this month could fade and weaken the pound against the dollar.

Bulls have recaptured $1.25 for now following the formation of a double bottom down at $1.2446. However, taking over $1.2550 is necessary for the chances of a slide towards $1.24 to increase. There, the pair will also be exposed to $1.2309. Conversely, an upside surprise could see bulls win over $1.2622 and eventually $1.2746, where the cable could exit the downward trend.

Source: SpreadEx / GBPUSD

Key Takeaways

Investors are still truing to figure out the upcoming BOE decision as doubts about a rate hike grow and expectations for future hikes decrease. BOE Governor Andrew Bailey said that rates may be nearing their peak, and the upcoming data will be crucial in determining if rate hike expectations will moderate. Inflation pressures affecting wages due to a tight labour market make it challenging for the BOE to close its hiking cycle. Despite previous predictions of a recession, the UK economy has managed to avoid contraction, but July GDP is expected to decline, and manufacturing production may slow down. If the economy moves closer to contraction, expectations for future rate hikes may weaken the pound against the dollar.