Pound fell on Thursday after UK Finance Minister Rishi Sunak said the country will not see a return to austerity for quite a long time.
But before discussing that, it is important to note that the Office of National Statistics recently reported that UK GDP grew 4.8% this second quarter, offsetting the 1.6% fall in the first quarter. Sadly, this rate is still below pre-crisis levels, so further support and observation is needed to push the economy to complete recovery.
Nevertheless, it is clear that the service sector is improving, as it is the main driver of growth to the GDP. Following it is the manufacturing sector, which rose 0.2%. Business investment also increased significantly, climbing by 2.4% in the second quarter. However, it is still 15.3% lower than the pre-pandemic level. As for construction volume, it actually decreased by 1.3%.
Going back to the issue of austerity, the statements of Sunak greatly surprised everyone. No one expected the finance minister to change his stance on stimulus measures so quickly, moreso when he said that he is ready to work with UK Prime Minister Boris Johnson in supporting the economy. Both of them previously held very different tones on spending, as Johnson wanted huge infrastructure projects, while Sunak always emphasized the need to curb the budget deficit, which swelled to enormous proportions during the pandemic.
Rumors say this move of Sunak stemmed from the talks that Johnson will appoint him as the new Minister of Health, which is somehow a demotion from his current position. But doing so is actually politically dangerous for the prime minister, as polls say Sunak is among the most popular cabinet members.
In any case, Sunak will soon present the public spending budgets for the next three years. Previously, he highlighted the need for fiscal restraint after the government spent around £ 350 billion to fight COVID-19. Sunak also cut aid spending and froze wages for some public sector workers, which prompted rumors of further austerity measures. But the tone of his statements yesterday were in contrast with such a scenario, especially when he said that he will increase annual government spending by £ 100 billion over the next five years.
This news ultimately pushed pound down yesterday, and today a lot will depend on 1.3830 as its breakdown will result in a move towards 1.3860 and 1.3890. But if bearish traders manage to bring GBP / USD below the 38th figure base, price will drop to 1.3765 and 1.3720.
EUR
A report on industrial output was released on Thursday, which indicated that production in the Euro area declined at a slower pace in June. The index fell by only 0.3% month-over-month, after a sharp 1.1% decrease in May. The drop was caused by a 1.5% decrease in capital goods production.
In the United States, the Department of Labor drew particular attention on the number of initial jobless claims, which fell to 375,000 in the reporting week. This is 12,000 lower from the revised 387,000 a week earlier. Meanwhile, the less volatile four-week moving average climbed to 396,250.
Employment in the nonfarm sector also rose 943,000, while the unemployment rate fell to 5.4%.
But the recent outbreak caused by the Delta variant will soon affect the recovery in the labor market, unless the government imposes new isolation measures.
Another important report is the data on producer prices, which jumped more than expected in July. The Department of Labor said it climbed 1.0% month-over-month and grew 7.8% year-on-year. Core inflation also rose 0.9% month-over-month and surged 6.1% year-on-year.
Despite that, EUR/USD remained in its range, not moving in a certain direction. But a lot will depend on 1.1747 today because climbing beyond it will result in a jump towards 1.1766 and 1.1787. Accordingly, if the pair declines below the level, price will drop to 1.1725 and 1.1707.
