GBP Ends September Stronger In The Wake Of Surprising UK GDP Data, EU CPI Missed Market Expectations

Summary:

• The UK economy grew in the second quarter of 2022.
• The acceleration in growth came after a boost to services output.
• EU CPI came in hotter than expected.

UK GDP surprised markets

The UK economy grew in the second quarter of 2022, according to the ONS, upending original forecasts of a 0.1% contraction. Revisions for the pandemic-related decline, however, were much smaller. In order for the UK to officially enter a technical recession with growth of 0.2%, the third and fourth quarters would have to show quarterly drops. According to the ONS, the acceleration in growth came after a boost to services output, which was expected to have grown by 0.2% in Quarter 2. The wholesale, retail, and health industries, however, continued to experience difficulty.

"The good news is that the economy is not already in recession. The bad news is that contrary to previous thinking, it still hasn’t returned to pre-pandemic levels," says Paul Dales, Chief UK Economist at Capital Economics.

UK GDP was initially predicted to have increased by 7.4% in 2021, however that estimate has since been revised upward to 7.5%. Real GDP is now projected to be 0.2% below pre-coronavirus levels in the fourth quarter of 2019.

GBP entering month end stronger

After posting gains versus the Euro, the Dollar, and the majority of other currencies over the last week, the British Pound appeared poised to close the month on a more solid foundation. Data showing that the UK economy increased in the second quarter, defying expectations for a contraction, will aid the rebound from the substantial lows recorded on Monday.

The initial estimate, which had read -0.1%, was beaten according to the ONS report which read that second-quarter GDP increased by 0.2%. The current account deficit was -£33BN (5.3% of GDP), which is still significant but less than the -£44BN consensus estimate. In actuality, the deficit has significantly decreased from the first quarter, when it was a massive -£51.7BN.

Many Pound exchange rates have totally recovered from the decline they experienced after Chancellor Kwasi Kwarteng's fiscal announcement, which caused investors to worry that UK debt levels would rise to unsustainable levels. This recovery was robust through Thursday. In contrast to the Dollar and the Euro, the Pound has not yet fully recovered.

EU CPI Inflation at 10%!?

The outlook for the remainder of the year from the eurozone remains bleak. The geopolitical tension surrounding the alleged sabotage of Nord Stream has made matters worse, and the eurozone is currently debating its ninth round of penalties as a result. However, restrictions on Russian gas continue to be a divisive matter inside the EU, with the commission advising countries that a combination of measures is needed rather than merely market intervention. The eurozone would have preferred to avoid this additional tension as it gets ready for an uncertain winter.

Current expectations for the CPI inflation in the Eurozone is set at 9.7%, 0.6% up from the previous 9.1%. If the actual EU CPI (YoY) inflation missed market expectations, coming in at 10%.

Will the ECB step up ?

Recently, the pressure on the euro has risen as it tries to regain parity. The European Central Bank's task of containing inflation will be made even more difficult by the lower sentiment numbers. On Thursday the markets saw German CPI increase by 1.9% more than expected on a monthly basis and by 10% year over year. The ECB will be forced to continue raising interest rates at this point. It will gradually bridge the gap with the Fed, causing the EUR/USD to stabilize, if not eventually soar back above parity.

The sluggish economy of the Eurozone in comparison to the US is an issue for the euro. For this reason, we do not anticipate the single currency to have a significant resurgence just yet.

The actual EU CPI inflation of 10% is likely to cause the EUR to weaken against its currency counterparts, however on the contrary, the high inflation could also instill the markets with confidence that the ECB will step up their interest rate hiking cycle to try regain control over inflation.

Sources: dailyfx.com, poundsterlinglive.com, investing.com