28 Jan 2025

• The Pound Sterling rebounds as UK PM Starmer confirms to have good trade relations with the US.
• Investors expect the Fed to call a pause in the current policy-easing cycle.
• Morgan Stanley has revised the UK GDP growth rate for 2025 lower to 0.9%.
• The Pound Sterling (GBP) has shown resilience against its major counterparts, with the exception of the US Dollar (USD), during the European trading session on Tuesday. The appreciation of the British currency can be attributed to the optimistic remarks made by UK Prime Minister Keir Starmer regarding the economic forecast in an interview with Bloomberg. Starmer emphasized that the primary focus of the Labour government is on "growth," asserting that the economy is beginning to "turn around." Regarding trade relations with the United States, he noted that there is already a "huge amount of trade" between the two nations, indicating a solid foundation for even "better trading relations."
• Starmer's optimistic remarks have contributed to a slight strengthening of the Pound Sterling, which has been trading with caution due to concerns regarding potential stagflation risks stemming from declining labor demand and persistent inflationary pressures.
  
  The hiring activity within the UK private sector has been significantly affected since Chancellor of the Exchequer Rachel Reeves increased employers’ contributions to National Insurance (NI) in the Autumn Budget. The preliminary S&P Global Purchasing Managers Index (PMI) report for January indicated a decline in employment levels for the fourth consecutive month, a trend that businesses often attribute to escalating cost pressures. The agency noted that numerous firms indicated that the impending increase in “employers’ NI” contributions has led to “reductions in recruitment plans,” while others pointed to a decline in business confidence following the Budget announcement.
  
  Although the UK Consumer Price Index (CPI) for December was lower than anticipated and below November’s figures, it is projected to remain relatively persistent as private companies transfer the effects of rising wage growth, energy costs, and the prices of imported raw materials onto consumers. According to S&P Global, the inflation rate reached its highest level in over eighteen months in both the manufacturing and services sectors.
• Weak employment levels combined with rising inflation are anticipated to result in stagflation within the UK economy. This scenario presents a significant challenge for the Bank of England (BoE), which is set to announce its initial monetary policy decision for 2025 on February 6. Market participants are factoring in a 25 basis point (bps) reduction in interest rates, which would lower borrowing costs to 4.5% in light of the subdued economic outlook.
  
  Investment banking firm Morgan Stanley has adjusted its projection for the UK's Gross Domestic Product (GDP) growth downward to 0.9% for the year, down from a previous estimate of 1.3%. This revision is attributed to indications of a decline in labor demand and weakened economic expectations.Weak employment levels combined with rising inflation are anticipated to result in stagflation within the UK economy. This scenario presents a significant challenge for the Bank of England (BoE), which is set to announce its initial monetary policy decision for 2025 on February 6. Market participants are factoring in a 25 basis point (bps) reduction in interest rates, which would lower borrowing costs to 4.5% in light of the subdued economic outlook.
  
  Investment banking firm Morgan Stanley has adjusted its projection for the UK's Gross Domestic Product (GDP) growth downward to 0.9% for the year, down from a previous estimate of 1.3%. This revision is attributed to indications of a decline in labor demand and weakened economic expectations.