Recent UK data continues to show that the economy remains resilient, which could ease pressure on the Bank of England to cut rates. In contrast, as inflation and the labour market continue to show weakness, it is widely anticipated that the BoC will cut the rate again this week.

GBP: Resilient economy

The pound is likely to continue benefiting from the interest rate differential and an improving global risk appetite, provided there are no significant negative developments from geopolitical risks, a more hawkish Fed, or shifts in risk sentiment. The release of the UK's August preliminary PMI indicates that the UK economy remains solid and resilient, reducing pressure on the BoE to further cut rates. The services PMI came in at 53.3, surpassing the expected 52.8, while the manufacturing PMI reached 52.5, slightly above the forecast of 52.1. The composite PMI also exceeded expectations, rising to 53.4 from a previous 52.8. However, despite easing price pressures, with input cost inflation at its lowest in over three and a half years, wage inflation remains elevated, particularly in the services sector, signalling that the inflation challenge is not yet fully resolved.

Attention now turns to UK Chancellor Reeves' first budget at the end of October. There is speculation about £20bn in tax increases, equivalent to around 0.7% of GDP. However, this may not constitute fiscal tightening, as the funds will be used to address the real-term cuts in public spending by the previous Conservative government. Public sector pay rises alone could account for as much as £10bn. For sterling, this could mean a fiscally neutral budget, allowing the pound to continue outperforming, especially against the dollar. Looking ahead, markets will focus on the UK August final PMIs; if the final figures confirm the preliminary data, showing the UK's economy remains solid, this could further support the pound and reduce the likelihood of a BoE rate cut in September.

CAD: Further cut this week

During the past trading week, the key data point was Canada’s Q2 GDP, which came in at 2.1% q/q, up from 1.8%. However, the details revealed no growth in June and July, with most of the quarterly growth driven by government spending. This prompted a reassessment of the economic outlook, particularly in light of falling oil prices. While the headline GDP data appears strong, Canada’s broader economic picture remains one of decent growth with limited recession risks. This suggests that, when viewed independently from aggressive US money market pricing, the case for the BoC initiating an easing cycle is not compelling.

Looking ahead, markets will focus on the BoC’s September meeting and Canada’s August labour market data. The current consensus expects the BoC to cut rates to 4.25%, as slowing growth and a cooling labour market are likely to keep inflation from rebounding. The latest inflation report indicates that the BoC’s target is coming within reach. Attention will be on the statement and press conference for clues on further easing. In July, Governor Macklem suggested that if inflation continues to ease as forecasted, further rate cuts are reasonable, although the timing will depend on how the BoC assesses the opposing forces of inflation—overall economic weakness pulling inflation down, while price pressures in shelter and other services keep it elevated.

The previous BoC statement acknowledged that risks to the inflation outlook are balanced, omitting the concern about upside risks mentioned in April. Money markets currently price in 25 bp cuts at each meeting for the remainder of 2024. The July inflation data showed the BoC's core measures easing to an average of 2.43%, with the previous figure revised down to 2.57% from 2.60%, reinforcing rate cut expectations. The July jobs report saw a headline decline, driven primarily by part-time job losses, while full-time employment surged. The unemployment rate remained unchanged at 6.4%, defying expectations of a rise to 6.5%. Despite this, with slowing growth and inflation seemingly returning to target, the BoC has room to continue with 25 bp rate cuts.

Additionally, although the August labour market data will be released after the September meeting, it will be crucial in determining the future path of BoC easing and is likely to have a significant influence on meetings later in the year. Rates are currently at 4.50%, and most analysts expect rates to end 2024 at 3.75%. However, seven analysts predict rates at 4.00%, while one sees them at 3.50%. With only three meetings left in the year, including September, the majority of analysts align with current market pricing, which anticipates 25 bp rate cuts in September, October, and December. A weak labour market report could strengthen the case for more dovish policy moves.

GBP/CAD 4H Chart

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