IFX Market Report: Friday 26th May 2023

On Wednesday the consumer prices index for April, as reported by the Office for National Statistics, recorded a decrease in inflation to 8.7%, compared to 10.1% in March. This marks the first time since last summer that inflation has dropped below double figures. It's worth noting that the inflation rate had reached its highest point at 11.1% in October. Borrowers have received a cautionary message to prepare for Bank of England interest rates surpassing 5% by the end of the year. This warning comes as the relentless increase in food prices resulted in UK inflation decreasing by a smaller margin than anticipated in the previous month.

The pound strengthened across the board after the data, prompted by views of a rate hike. GBPUSD touched 1.2470, up from 1.24 whilst GBPEUR peaked at 1.1550.

The International Monetary Fund (IMF) has announced that the UK economy is anticipated to steer clear of a recession this year, as it has significantly revised its growth projection. The IMF also believe that the UK will now no longer be the weakest performer of the top 7 industrialised countries, with Germany looking at ‘near zero’ growth. In its latest assessment, the IMF now predicts a growth rate of 0.4% for the UK in 2023, whereas in the previous month, it had foreseen a contraction of 0.3% for the economy. The IMF attributes this upward revision to resilient demand and the decline in energy prices, which are expected to support growth. However, the IMF cautions that inflation continues to persist at high levels and emphasizes that higher interest rates will need to be maintained in order to bring it down.

Researchers at the London School of Economics (LSE) have revealed that British households have spent a total of £7 billion following Brexit to compensate for the additional expenses caused by trade barriers on food imports from the European Union. The LSE's most recent report, which assessed the impact of the UK's departure from the EU on food prices, found that trade barriers consistently hindered imports, resulting in an average increase of £250 in bills. The researchers calculated that the cost of food in the UK has surged by 25% since 2019. However, they estimated that if the trade restrictions implemented after Brexit were not in effect, this increase would have been only 17%, representing a reduction of almost one-third.

The US dollar has pulled back some of its recent losses after its fourth consecutive session of strengthening against a basket of major currencies. This was primarily attributed to positive US data indicating the resilience of the economy, even after a series of aggressive interest rate hikes by the Federal Reserve. Weekly initial jobless claims increased by 4,000 in the previous week, totaling 229,000, which was slightly above the estimated figure of 225,000 by Reuters. However, the data from the prior week was significantly revised downwards, suggesting that the labor market is showing minimal signs of weakness. In contrast, the German economy, the largest in Europe, experienced a recession in the first quarter, with a GDP contraction of 0.3%.

GBPUSD now resides at 1.2340, whilst GBPEUR reside at 1.15 & EURUSD sits at 1.0722

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