Inflation Impact on UK Manufacturing Amid Red Sea Tensions

Summary

  • British services firms have witnessed quicker growth this month, but national manufacturers are bearing the brunt of inflation as a result of the Red Sea tensions.
  • The latest Purchasing Managers’ Index (PMI) figures reveal this dichotomy.
  • Chief Business Economist at S&P Global Market Intelligence, Chris Williamson, observes that the unexpected surge in growth in January might prompt the Bank of England (BoE) to reconsider reducing interest rates.
  • The composite PMI for S&P Global/CIPS UK, representing both the manufacturing and the services sectors, rose to 52.5 in January, a seven-month high.
  • The BoE’s forthcoming decision on interest rates and economic prospects, scheduled for February 1, is certain to affect the market’s future course.

PMI and the UK economy

The positive report about the UK economic recovery, particularly within the services sector, starkly contrasts with the continued depression seen in the euro zone, where the composite PMI remained negative in January.

Interest rate prediction

According to James Smith, an economist at ING, the issue concerning the Bank of England is the persistent inflation, which the PMI data reflects. However, as a silver lining for the households, it is anticipated that the BoE will start reducing rates from August before any national election in 2024.

BoE Cautious Approach

Allen Monks from JP Morgan, despite the PMI indicating false growth signals in the past, suggests that the current economic conditions will likely ensure the BoE adopts a cautious approach when planning for future rate cuts.

Market Activity for Services & Manufacturing Firms

Other market indicators provided by the PMI survey point to positive trends for the UK economy. There’s a significant focus on the activities of services firms, which achieved an eight-month high reach of 53.8. In contrast, the manufacturing sector continues to face a downturn, but the rate of contraction saw a slight decrease.

Impact on Future Forex Trading

Given the current economic climate, an understanding of BoE’s policy changes regarding interest rates and their cautious approach towards the economy’s foreseeable future can immensely impact forex trading and likely affect the value of the British Pound.

PIP Penguin
Logo