UK Economy Contracts, Pound Weakens on Recession Fears

In the wake of the release of official data indicating a contraction in the UK economy in October, the pound faced a 0.31% decline against the US dollar. This dip was attributed to concerns over a potential recession and a test of the Bank of England's commitment to maintaining high interest rates in the face of economic challenges.

British government bond yields saw a significant drop, contributing to the pound's weakening against the US dollar. However, the currency had experienced a boost earlier in the week following the publication of the Purchasing Managers' Index, which supported the Bank of England's decision to refrain from discussing interest rate cuts.

The Office for National Statistics revealed that Britain's GDP contracted by 0.3% in October, raising the specter of a recession and challenging the Bank of England's strategy of holding interest rates at their 15-year high. While economists had anticipated no change in GDP, this decline marked the first contraction on a month-by-month basis since July, leading investors to increase bets on a potential interest rate cut by the Bank of England in June 2024. Despite these concerns, the central bank is expected to maintain the Bank Rate at 5.25%, emphasizing its commitment to curbing the persistently high inflation rate, which stood at 4.6% in October.

A survey indicated a pickup in growth in Britain's services sector, providing a positive outlook amid concerns of a recession. The Purchasing Managers' Index for the services sector climbed to 52.7, while manufacturing experienced a decline to 46.4, marking the 17th consecutive month of contraction. The survey suggested a potential first-quarter rate cut in 2024 if the hiring slowdown and weaker price increases persisted.

The services sector contracted by 0.2% in October, while manufacturing and construction experienced contractions of 1.1% and 0.5%, respectively. Despite the economy being 2.0% larger than pre-pandemic levels in 2020, the overall performance was weaker than expected.

British wage growth saw a significant slowdown, recording its sharpest fall in almost two years. However, despite the slowdown, earnings, excluding bonuses, were still 7.3% higher in the three months to October compared to the previous year. The Bank of England remained cautious about reducing interest rates, emphasizing that the private sector's robust wage growth was a concern for achieving the inflation target.

Despite the economic challenges, Britain's struggling factories showed signs of recovery in the final quarter of 2023, with output surpassing orders at the highest rate since 2019. Expectations for export and UK orders in early 2024 were positive, offering a more optimistic outlook for the manufacturing sector.

In the property market, November saw a recovery as mortgage rates eased, according to industry surveys. However, surveyors remained cautious about the economic outlook, with concerns about the flatlining economy and the prospect of elevated borrowing costs.

The US dollar faced downward pressure due to the Federal Reserve signaling the possibility of interest rate cuts in the coming year. Yet, when comparing the returns disparity between two comparable nations, the US dollar is anticipated to continue receiving support from economic data, which is expected to remain relatively robust compared to the UK.

Data for Technical Analysis (30 Min) CFD GBP/USD

Resistance : 1.2680, 1.2686, 1.2697

Support : 1.2658, 1.2652, 1.2641    

30 Min Outlook  

Source: Investing.com

Buy/Long 1 If the support at the price range 1.2653 - 1.2658 is touched, but the support at 1.2658 cannot be broken, the TP may be set around 1.2687 and the SL around 1.2651, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.2680 - 1.2685, TP may be set around 1.2700 and SL around 1.2656, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.2680 - 1.2685 is touched, but the resistance 1.2680 cannot be broken, the TP may be set around 1.2658 and the SL around 1.2687, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.2653 - 1.2658, TP may be set around 1.2635 and SL around 1.2682, or up to the risk appetite.       

Pivot Points Dec 19, 2023 07:34AM GMT

Sources: Investing 1, Investing 2