UK Economy Shows Modest Growth as Inflation Eases

The UK economy registered a slight 0.1% growth in GDP in November 2024, underperforming the expected 0.2% increase. This modest expansion follows contractions in previous months, highlighting weak economic momentum as the country faces a challenging fourth quarter. Annual growth slowed to 1.0%, down from 1.1% in October, reflecting a broader deceleration compared to earlier in the year. Business and consumer confidence remain low, pressured by fiscal policies such as higher National Insurance Contributions and concerns over global trade under the new U.S. administration.

Chancellor Rachel Reeves’ October budget introduced significant tax increases, sparking worries about its impact on economic growth. Businesses have responded cautiously, prioritizing cost-cutting measures that could hinder hiring, wage growth, and investment in 2025. The Bank of England (BoE) is under pressure to address these challenges, especially as inflation eased to 2.5% in December. This decline in inflation, along with reductions in core and services inflation, offers some relief to policymakers but underscores the fragility of the recovery.

The BoE has already cut its benchmark rate twice since August, with another reduction anticipated in February 2025. Analysts predict further monetary easing throughout the year to support economic recovery. The International Monetary Fund (IMF) projects a modest GDP growth of 1.6% in 2025, driven by public investment and relaxed monetary policies. However, risks persist, including weak manufacturing output and the uncertain effects of fiscal measures.

Retail sales data added to concerns, with a 0.3% month-on-month decline in December, following a 0.1% increase in November. Quarterly retail sales fell 0.8%, dragging Q4 economic growth by 0.04 percentage points.

Despite broader economic struggles, the housing market showed resilience. House prices rose 3.3% annually in November, while rents increased by 9% year-on-year in December, with London leading the gains. Early January data indicated a rise in new property listings and buyer inquiries, reflecting cautious optimism. However, sustained growth in the housing sector hinges on BoE rate cuts to ease mortgage affordability concerns.

The 10-year gilt yield declined to 4.622%, marking the largest weekly drop since July, influenced by weak data and expectations of further BoE rate cuts. A 25-basis-point reduction is widely forecast at the February meeting, with more cuts likely throughout 2025.

The U.S. dollar fluctuated as markets reacted to potential tariffs proposed by President Donald Trump. Trump suggested a 25% tariff on imports from Canada and Mexico, citing concerns over fentanyl trafficking and unauthorized immigration. The dollar index ended slightly higher at 108.00 after falling 1.24% the previous day, continuing a broader weakening trend, as markets were reassured that any tariffs would be implemented gradually.

The U.S. faces significant fiscal challenges, with deficits projected to worsen beyond recent Congressional Budget Office (CBO) estimates. The CBO revised its 10-year deficit forecast, showing a slightly improved outlook, but analysts described these projections as overly optimistic. Debt-to-GDP is forecast to reach 118.5% by 2035, down from a previous estimate of 122% by 2034. However, extending Trump-era tax cuts could add over $4 trillion to deficits over the next decade.

The CBO also projected interest rates remaining below 4% through 2035, a scenario analysts view as unlikely given current market conditions, where yields are already above 4%. Treasury Secretary Scott Bessent attributed recent deficits to excessive government spending. However, fiscal policy clarity remains limited, leaving markets uncertain about the long-term trajectory.

Data for Technical Analysis (1H) CFD GBP/USD

Resistance : 1.2346, 1.2351, 1.2359

Support : 1.2330, 1.2325, 1.2317

1H Outlook   

Source: TradingView

Buy/Long 1 If the support at the price range 1.2310 - 1.2330 is touched, but the support at 1.2330 cannot be broken, the TP may be set around 1.2346 and the SL around 1.2300, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.2346 - 1.2366, TP may be set around 1.2371 and SL around 1.2320, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.2346 - 1.2366 is touched, but the resistance at 1.2346 cannot be broken, the TP may be set around 1.2325 and the SL around 1.2376, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.2310 - 1.2330, TP may be set around 1.2297 and SL around 1.2356, or up to the risk appetite.       

Pivot Points Jan 22, 2025 02:33AM GMT