UK Government Implements New Policy for Budget Watchdog Amid Fiscal Challenges

The new British government announced that its official budget watchdog must evaluate significant tax and spending policy changes, as any measure or combination of measures costing at least 1% of GDP. This policy follows a commitment made by the Labour Party before their July 4 election victory. Previously, in 2022, former Prime Minister Liz Truss and her finance minister Kwasi Kwarteng caused a slump in government bond prices by announcing tax cuts without such an assessment.

Recent data shows Britain borrowed more than expected in June, highlighting fiscal challenges for Prime Minister Keir Starmer's government. Additionally, inflation remained at 2% in June, partly due to rising hotel prices influenced by major events, contradicting forecasts of a slight decrease. This persistent inflation, along with strong underlying price pressures, has led to doubts about a potential interest rate cut by the Bank of England (BoE) on August 1.

Despite slightly slower wage growth, pay increases remain high, with average annual pay settlements at 4.9%. Meanwhile, the new government is considering inflation-adjusted pay raises for nearly 2 million public sector workers to avoid strikes.

The UK's household savings rate has significantly increased since the COVID-19 pandemic, reaching 11.1% in early 2023. This contrasts with the US and the eurozone, where households have been spending their savings more freely, supporting consumption and economic growth.

British retail sales volumes declined by 1.2% in June due to cooler weather, surpassing economists' forecast of a 0.4% drop. Despite wages rising faster than inflation, shoppers are hesitant to spend. Consumer confidence rose to its highest in nearly three years, though the new government and England's soccer team's performance had little impact. Improved willingness to make major purchases could benefit retailers, but overall feelings about the economy remained unchanged.

House prices increased by 2.2% annually in May, following a 1.3% rise in April, while private rents grew by 8.6% in the year to June, slightly down from May's 8.7%.

The Bank of England advised banks to use its repo facilities more as it reduces government bond holdings by £100 billion annually, potentially raising interest rates. Cash reserves held by banks at the BoE need to decrease to between £345 billion and £490 billion to significantly impact interest rates.

Commodity currencies hit multi-week lows due to weak Chinese demand. UBS analysts remain optimistic about a soft landing for the U.S. economy, citing moderating consumer spending and a downward trend in inflation. They expect the Federal Reserve to cut rates, likely starting in September. UBS points to slowing growth indicators, like the ISM PMIs, and easing inflation pressures, including a long-anticipated slowdown in rents.

In other economic news, U.S. companies borrowed 4% less for equipment investments in June compared to a year ago, with new loans, leases, and credit lines down 2% from May. The Equipment Leasing and Finance Association reported stable credit approvals and a slight increase in its confidence index for July.

Key economic data, including second-quarter GDP and June's PCE price index, will be crucial for the outlook. While GDP growth is expected to accelerate, inflation measures are not projected to reach 2% until at least 2026. Most economists believe inflation will likely be higher than their forecasts for the rest of the year. The Fed is anticipated to cut rates once per quarter through 2025, aiming for a federal funds rate of 3.75%-4.00% by the end of 2025. As a result, the GBP/USD currency pair is likely to trade towards the upper range during this period.

Data for Technical Analysis (30Min) CFD GBP/USD

Resistance : 1.2892, 1.2893, 1.2895

Support : 1.2888, 1.2887, 1.2885

30Min Outlook

Source: TradingView

Buy/Long 1 If the support at the price range 1.2883 - 1.2888 is touched, but the support at 1.2888 cannot be broken, the TP may be set around 1.2892 and the SL around 1.2881, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.2892 - 1.2897, TP may be set around 1.2903 and SL around 1.2886, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.2892 - 1.2897 is touched, but the resistance 1.2892 cannot be broken, the TP may be set around 1.2887 and the SL around 1.2899, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.2883 - 1.2888, TP may be set around 1.2877 and SL around 1.2894, or up to the risk appetite.       

Pivot Points Jul 24, 2024 03:19AM GMT