IFX Market Report: Tuesday 29th August 2023

This morning, the UK experienced a decrease in shop price inflation during August, marking the lowest point in nearly a year. This shift was attributed to a reduction in the pressures on food costs, as indicated by industry data. According to information released by the British Retail Consortium on Tuesday, the yearly inflation rate dropped to 6.9 percent in August, a decline from July's 8.4 percent and the least elevated level since October 2022. Inflationary factors, particularly affecting food prices, have been intense, but the data from BRC illustrated a slowdown in food inflation to 11.5 percent in August. This figure was a decrease from the previous month's 13.4 percent and the lowest point since September of the previous year.

This week was anticipated to serve as a dependable marker of progress towards lower inflation, indicating that the economy was moving away from three years of inflation-related challenges and sudden upheavals. The unexpected surge in household energy costs that pushed inflation past 11% was reversed, causing inflation to drop below 7% in July. However, the data contained an important negative aspect. Indicators of fundamental inflation, including core inflation that excludes the immediate influence of energy and food, remained fixed at the rate seen in June. In fact, inflation in services experienced an increase, reaching a level that had last been seen 31 years ago.

Official statistics indicate that the UK economy experienced modest growth during the three months leading up to June. The Office for National Statistics (ONS) reported a 0.2% expansion in the gross domestic product (GDP) during the second quarter of the year. Specifically, June witnessed a rise of 0.5% on its own. This follows a growth rate of 0.1% in the initial quarter, which was the minimal threshold to still be categorized as economic growth. Experts noted that the economy rebounded in June after a decline in the previous month, when an additional public holiday was observed to celebrate the King's coronation.

Economists forecast that the Bank of England will implement its 15th consecutive interest rate hike next month, with interest rates in the UK reaching their highest point at 5.5%. This move is aimed at mitigating the potential negative effects of increased borrowing expenses on the UK economy and preventing an extended period of economic decline. According to a recent survey of economists conducted by Reuters, the Bank of England is expected to endorse this interest rate increase during its upcoming meeting on September 21. This step is part of the bank's strategy to address the persistently elevated price inflation, which remains more than three times above its target of 2%.

A prominent figure at the US Federal Reserve has hinted at the possibility of additional increases in interest rates within the United States. This official cautioned that due to the vigour displayed by the largest global economy, there might be a necessity for further rate adjustments. Susan Collins, who holds the position of president at the Boston Fed, expressed her astonishment at the economy's durability. This included the observation of a strong labor market and substantial consumer spending, despite enduring several months of elevated borrowing expenses

The pound has weakened since the new BOE rate forecasts, this is because the previous expectation was that rates would push to around 6.5% have now been pulled back to 5.5%, so investors have drawn money back from pound investments. The USD has taken the majority of investor money from the new forecasts and GBPUSD has moved from 1.31 at the beginning of the month to 1.26 as it stands. GBPEUR is still trading up around 1.1650, whilst EURUSD resides around 1.08

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