Q4 UK Economic Outlook

BoE remains cautious but GBP strengthens

By Rufas Kamau | @RufasKe | 7 October 2024

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UK Economy
  • GBP Rally: The British pound has gained 4.08% against the USD, with GBP/USD expected to rally to 1.4234, driven by BoE's cautious stance and Fed rate cuts.

  • FTSE 100 Concerns: The FTSE 100 may face a correction in Q4 2024 due to BoE's tight monetary policy and concerns over the UK's rising public debt.

In the Q4 of 2024, the UK economy faces a delicate balancing act between inflation control and growth. The Bank of England cut interest rates for the first time in August, but its recent monetary policy decisions reflect a cautious stance due to persistent inflation concerns.

GBPUSD likely to rally to 1.4234

The British pound has gained 4.08% against the USD over the past three months, behind only the Swiss franc (5.4%) and Japanese yen (11.97%). The yen's strength is driven by the Bank of Japan’s rate hikes and the unwinding of the yen carry trade, while the Swiss franc has emerged as a favoured currency for carry trades following two rate cuts by the Swiss National Bank (SNB), reducing interest rates from 1.75% to 1.25%.

UK Economy Picture

In recent months, the Bank of England (BoE) has maintained a cautious approach to interest rate cuts, despite inflation reaching its 2% target in May and June and rising slightly to 2.2% in July. At its August 2024 meeting, the BoE cut interest rates by 25 basis points and projected inflation could rise to 2.50% by Q4 2024.

BoE promised to avoid significant rate cuts and confirmed this stance at its September meeting by keeping rates steady at 5.00%. Inflationary pressures persist, driven by price increases in key sectors such as hospitality, insurance and housing, as well as stronger-than-expected demand for goods and services.

In contrast, the US Federal Reserve cut interest rates by 50 basis points in September, lowering them to a range of 4.75% to 5.25%. This move further strengthened the British pound, positioning it as one of the strongest global currencies and potentially boosting demand for UK government bonds as yields on 10-year bonds rise to 3.776%. Among major currencies, only New Zealand's central bank has a higher interest rate than the UK.

The GBP/USD pair is expected to continue its rally to the 2021 high of 1.4234 in Q4 2024, further boosted by uncertainty surrounding the upcoming US presidential elections in November.

Negative outlook for FTSE 100 Index

The FTSE 100 Index has experienced a modest increase of over 6% year-to-date. However, it’s anticipated that the index will enter a correction phase in Q4, following the BoE’s decision in September to maintain interest rates at 5.0%.

In addition, concern about the UK’s public debt, which was 100 percent of GDP in August, has increased. This development has raised concerns about the upcoming UK budget on 30 October, which may propose tax increases and cuts to social benefits and other spending.

The expected tightening of fiscal policy and the tight monetary policy of the BoE are expected to have a negative impact on the performance of FTSE stocks in the last quarter of 2024.

Number one UK stock to watch in Q4

The British semiconductor and software design company Arm Holdings PLC listed on the NASDAQ stock exchange on 14 September 2023 in an initial public offering. So far, the stock has returned 127% and 100% of the profit has come in 2024 so far.

Despite making a $110 million loss in the Q3 of 2023, the company has made a turnaround and reported increasing profits over the past three quarters, with profits rising to $223 million on revenue of $939 million in the quarter ending in June 2024.

As the AI revolution gains more pace in 2024, Arm has positioned itself as a leading provider of semiconductor infrastructure and software for some of the top tech giants such as Apple, Broadcom, Marvell, Nvidia, Qualcomm, Google, Amazon, Microsoft, and Samsung. The company’s 99% market share in smartphone processors makes it the number one stock to consider when investing or looking to gain exposure to the AI advancements and adoption.

Analysts surveyed by the Wall Street Journal have given the stock an overweight rating, with a median target of $143.41, a low of $80 and a high of $200. Furthermore, the company is ready to benefit significantly from the launch of Apple’s iPhone 16, which includes Arm’s most advanced microchips and processors. This development highlights Arm Holdings’ pivotal role in the tech industry and its potential for continued growth.

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