GDP drives GBP: Faster than estimated recovery

Friday’s GDP data showed the UK leading the G7 in annual GDP growth in 2022, possibly giving room for sterling to bounce.

The pound initially gained ground against other major currencies on the morning of Friday, September 29, following the release of final GDP data for the second quarter. This article summarizes recent significant economic indicators from the UK and anticipates potential movements in the GBPUSD and GBPJPY charts.

The British GDP data on September 29 was largely positive. The final quarterly GDP growth for Q2 remained steady at 0.2%, while annual growth increased to 0.6%. Additionally, the annual figure for the first quarter was revised upward from 0.2% to 0.5%.

These releases indicate that the UK's economic recovery from the pandemic, in terms of GDP, has been faster than previously estimated. Overall, the British economy has expanded by approximately 1.8% compared to the end of 2019. This growth surpasses that of France and Germany but falls short of the USA, Japan, and other countries. Recent quarterly GDP data suggest a state of stagnation rather than an impending recession.

British quarterly GDP growth

The economic recovery in 2020 and 2021 was uneven. Nevertheless, the UK successfully staved off a technical recession that year. As of 2023, available GDP data consistently indicate marginal growth. This positive trend is notably different from predictions around this time last year when both analysts and the Bank of England warned of a potential severe recession for the current year.

A technical recession is typically defined as two consecutive quarters of negative GDP growth. Given the present data, the prospects of facing such a downturn have notably decreased. However, among all the G7 nations, the UK continues to confront significant inflationary challenges.

British annual headline inflation

The inflation rate has seen a marked and consistent decline since the third quarter of the previous year, bottoming out just below 7%. However, this figure remains substantially higher than the Bank of England's traditional target of 2%. In a surprising move during its last meeting, the Bank of England (BoE) opted not to increase rates. The Monetary Policy Committee's decision to hold at 5.25% was determined by a slim majority of just one vote. Their rationale centered on clear signs of improving inflation dynamics, paired with a more tempered labour market, leading them to maintain the bank rate and monitor ongoing developments.

Nevertheless, there's a prevailing sentiment that the BoE might mirror the Federal Reserve's strategy, maintaining elevated rates for an extended period and avoiding hasty shifts. While most market participants anticipate a stable bank rate in the forthcoming statement on 2 November, there remains potential for another increase in December if inflation doesn't recede.

No major UK data releases are anticipated next week, implying that prevailing sentiments and technical factors may largely influence market dynamics until the US job report on 6 October. However, if a US government shutdown materializes in the coming week, the release of the Non-Farm Payroll (NFP) report could be postponed. Thus, it's crucial to stay updated with the news and be ready for potential adjustments.

Cable, daily

Cable is poised for its weakest monthly performance in a year, influenced by the Fed's 'hawkish hold' and recent unfavorable data from the UK, barring the GDP figures. The 38.2% monthly Fibonacci retracement level is being eyed as potential support, given the notable rebound witnessed around that mark. A short-term objective might lie around the 50% Fibonacci level at $1.235.

Under typical circumstances, one might anticipate a pause or consolidation in such an extended downtrend. This expectation is bolstered by recent oversold indicators from tools like the slow stochastic and Bollinger Bands. An inability to surpass $1.24 might indicate a further decline. However, the upcoming Non-Farm Payroll (NFP) report on 6 October could provide more clarity on the future trajectory.

Pound-yen, daily

Sterling has maintained its strength against the yen more robustly than against many other currencies. This resilience can be attributed to the Bank of Japan's pronounced dovish stance. It remains the only major central bank that hasn't increased its base rate post-Covid, while others appear to be concluding their current tightening phase. Despite Japanese annual headline inflation consistently exceeding 3% for a year, the BoJ remained committed to its ultra-accommodative policy during its September meeting.

Regarding technical indicators, the price hasn't decisively breached the 100 SMA and seems poised to retest the 50 SMA, especially after an oversold crossover in the slow stochastic. Yet, in the near term, the pound-yen pairing might not pique the interest of medium-term investors. A significant fundamental catalyst would likely be required to surpass the ¥186.50 threshold.

This situation doesn't pose a significant concern for carry traders, as the interest rate differential is expected to favor the pound by 5.35% for the foreseeable months. However, Japan's Ministry of Finance has sounded alarms about potential market interventions recently. In the absence of significant data releases from both Japan and the UK next week, traders might shift their focus to bond yields from the respective nations and any emergent political news.

This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.

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Author:

Michael Stark

Michael has been investing in shares and currencies for 12 years, with a focus in the past seven specifically on CFDs. As an associate of the Society of Technical Analysts, Michael's primary concentration is on charts and indicators. His goal in educating traders is to simplify matters wherever possible and help them find their 'aha!' moment when they achieve what they're looking for from speculation with CFDs.