IFX Market Report: Wednesday 26th July 2023

In July, there was a significant deceleration in the UK's economic activity, mainly due to the impact of increasing interest rates on consumer spending and a further decline in manufacturing. This information comes from a highly monitored survey. According to the recently published data on Monday, the flash UK PMI services output index, which measures sector activity, dropped to its lowest level in six months at 51.5.

According to a recent IMF projection, the UK's output is predicted to expand by 0.4% in 2023. While this growth rate is faster than Germany's, it remains slower compared to all other countries in the Group of 7. Notably, this forecast represents a positive revision of 0.7 percentage points from the IMF's earlier prediction. The IMF attributes this upgrade to stronger-than-anticipated consumption and a reduction in Brexit uncertainty, which has positively influenced the economic outlook.

The International Monetary Fund (IMF) has issued a warning that the UK will have to maintain higher interest rates for a more extended period than previously predicted to address the persistent issue of elevated inflation. In its regular assessment of the global economy, the IMF specifically highlighted the US Federal Reserve and the Bank of England as two central banks that will have to implement more aggressive increases in official borrowing costs compared to their assumptions from just three months ago. The current forecast for Interest rates in the medium term has been revised down slightly to 6% from as high as 7%.

BlackRock, a prominent asset manager, has issued a warning about potential economic turmoil in the US. Despite inflation having eased considerably from its peak last summer, conflicting pressures in the economy may lead to price volatility in the future. The shift in consumer spending from goods to services is causing deflation in goods prices. However, simultaneously, the tight labor market is driving wage inflation as workers demand higher pay.

According to BlackRock's analysis, this situation could lead to a rollercoaster-like trajectory for inflation over the coming quarters, eventually settling near 3%, which is considerably higher than the Federal Reserve's target of 2%. This combination of factors could result in an unusual scenario known as a "full employment recession," where inflation remains elevated despite economic challenges.

As for the news content, the eurozone's economic downturn intensified at the beginning of the third quarter, as indicated by a closely monitored business survey, which suggests that the region's economy is contracting. The HCOB flash eurozone composite purchasing managers' index, which measures business activity across the 20-country bloc, declined to an eight-month low due to a more significant than expected slowdown in services and a sharper decline in manufacturing during July. These results are likely to add to the growing demands for the European Central Bank to halt its plans of raising interest rates after an anticipated quarter percentage point rate increase set for Thursday.

GBPUSD has remained range bound since last week, it briefly dipped below 1.28 but has settled around 1.29. The Euro weakened around 0.4% yesterday and has settled around 1.1645 (GBP) and 1.1072 (USD)

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