GBP/USD Consolidates its Losses as the UK Economy Avoids Contraction Again

  • GBPUSD
    (${instrument.percentChange}%)

GBP/USD Analysis

The UK economy flat-lined in the third quarter (0.0% q/q) according to today's preliminary figures, but managed to avoid a contraction for fourth straight quarter. On yearly basis, GDP grew by 0.6%. Despite the generally less bad than feared performance, the economy remains in a precarious position, with suppressed factory and manufacturing activity, increased borrowing costs and shrinking money supply. There is real risk of recession, as the Bank of England projects no growth in 2024, conditioned on interest rates staying at around current levels. [1]

Policymakers have kept them steady at 5.25% for the last two meetings as inflation has moderated. However, they may have a hard time staying on the sidelines, since they don't expect CPI to fall below the 2% target for another two years. After the GDP release, Chancellor of the Exchequer Jeremy Hunt said that "high inflation is the single greatest barrier to economic growth" [2]. There is a bit of a Catch 22 though, as restoring price stability may require further rate hikes, but that could harm economic growth even more.

GBP/USD is having a bad week and dropped yesterday, after Fed Chair Powell firmed up his rhetoric. According to his latest speech, he is "not confident" that a sufficiently restrictive stance to bring inflation back to target has been achieved [3]. This was a tad more hawkish compared to last week's remarks, but still much softer than last month's unequivocal "no" on whether policy is sufficiently restrictive. [4]

The pair returns below the EMA200 (black line), which keeps it vulnerable to 1.2036, but further losses towards 1.1801 have a higher degree of difficulty. On the other hand, GBP/USD tries to find support today, as the better than expected GDP keeps more BoE tightening in play, but that theme cannot provide significant boost. Another push towards the 38.2% Fibonacci of the July-October drop would not be unreasonable, but the upside is hostile and the British Pound does not inspire confidence for a meaningful recovery at this stage.

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Nikos Tzabouras

Senior Financial Editorial Writer

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 09 Nov 2023 https://www.bankofengland.co.uk/monetary-policy-report/2023/november-2023

2

Retrieved 09 Nov 2023 https://twitter.com/hmtreasury/status/1722892827712000155

3

Retrieved 09 Nov 2023 https://www.federalreserve.gov/newsevents/speech/powell20231109a.htm

4

Retrieved 15 Apr 2024 https://www.youtube.com/watch

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