FX.co ★ UK economy not doing as well as officials say

The British pound showed no reaction to an increase in consumer confidence in the UK to its highest level in 17 months despite continuing inflation and the Bank of England's rate hikes. However, if we delve into the details, things are not as rosy as they may seem

The British pound showed no reaction to an increase in consumer confidence in the UK to its highest level in 17 months despite continuing inflation and the Bank of England's rate hikes. However, if we delve into the details, things are not as rosy as they may seem.

According to research company GfK Ltd., the index rose by 3 points to minus 24 in June, while economists had expected it to be at minus 26. These figures indicate that households are still experiencing the worst cost-of-living crisis in many generations.

This is a sharp difference from investors' bets that the Bank of England will increase borrowing costs over the summer in an attempt to tame stubbornly high inflation. The regulator's actions have already pushed mortgage rates into painful territory, which could potentially trigger a recession. Earlier this year, the UK government said the country avoided a recession. As a reminder, the Bank of England raised interest rates by 50 basis points to 5% yesterday, the highest level in 13 years. So, the fight against persistent inflation is in full swing.

"Consumers are showing remarkable resilience in the face of inflation that is currently refusing to yield. If consumers continue to weather the current economic storm, then this will provide a firm foundation for getting back to growth," GfK noted.

The report states that an index measuring the outlook for personal finances showed a healthy 7-point increase and is now near positive territory for the first time since December 2021. Meanwhile, a measure of sentiment rose 3 points to minus 24 in June.

As for the mortgage market, it is currently in a terrifying state as rapidly rising interest rates threaten to bankrupt households and disrupt the economy. Against this backdrop, the dream of a soft landing, which would allow the Bank of England to tame inflation without plunging the country into a recession, will hardly come true. According to the latest data, inflation continues to slow down, forcing the BoE to act aggressively. Economists believe that the only way to curb prices is to go even further and raise rates to levels unseen in over two decades.

Of course, this would have a serious impact on the mortgage market, which is already in dire straits. A decrease in lending, including consumer lending, is posing another risk for the economy.

Economists predict that borrowing costs will continue to rise not only in the UK but also in several other countries. Federal Reserve Chair Jerome Powell recently stated that after pausing tightening last week, rates would be lifted again in July. In the eurozone, policymakers who spoke this week were also hawkish.

GBP/USD is still in demand despite a minor correction. After a breakout through 1.2760, the price will likely rise to 1.2820. This could pave the way for a surge to 1.2880. In case of a decline, the bears will attempt to take the situation under control below 1.2690. If they succeed, a breakout through will trigger a fall in GBPUSD to a low of 1.2630, targeting 1.2570.

As for EURUSD, the bulls will maintain control of the situation, if they push the price above 1.0960 and consolidate. In such a case, growth will extend to 1.1010 and 1.1030. The price would even reach 1.1060 should data in the eurozone come upbeat. If quotes go down, I expect a significant increase in buying activity around 1.0910. If there is no activity there, it would be wiser to wait for the price to reach a new low at 1.0860 or open long positions at 1.0810.