UK Economy and Pound's Performance in Recent Months
The UK economy has been facing a series of disappointing economic indicators, with the pound experiencing significant losses against major currencies, particularly the US dollar. The recent escalation of the Russo-Ukrainian war appears to have had a negative impact on the pound's performance, with cable reaching a low of nearly five months around $1.26 in November. This article will examine the recent news and data affecting the pound, as well as provide an analysis of the charts for GBPUSD and GBPJPY.
British Economy's Performance
The British economy had experienced a mild recession in the second half of 2023, which ended in the first quarter of this year. However, growth in the third quarter seems to have declined more than expected. According to recent data, the consensus for the preliminary figure for GDP in the third quarter was 0.2%. While this may not seem like a significant miss, it is essential to consider the broader context of lukewarm business and consumer sentiment, as well as relatively limited discretionary spending after years of high inflation.
The probability of a recession in 2025 appears to be higher for the UK than for other broadly equivalent countries such as France. This increased risk is likely due to the combination of higher inflation and relatively strong growth in average earnings. As a result, it is expected that the Bank of England (BoE) will reevaluate its current policy cycle and may be more inclined to cut interest rates.
Inflation and Interest Rates
The recent data on inflation has been mixed, with the rate increasing by 0.1% to 2.3% in October. This rise was largely due to the cap on energy prices implemented last month. However, annual core inflation also increased to 3.3%. While these numbers may seem relatively low compared to other countries, they are still a cause for concern.
The BoE is likely to be under pressure to cut interest rates, particularly given the current government's comfortable majority in parliament. This would mean that there is less political pressure on the BoE compared to some other major central banks. However, traders and analysts are now looking ahead to retail sales and PMIs on Friday 22 November from the UK.
Opportunity for Cable to Rebound Depending on Data
The pound has experienced significant losses against the US dollar in the third quarter so far, having been overheated in September. The election of Donald Trump has generated some negativity due to the likely introduction of tariffs and general deterioration of relations between the UK and USA. However, with the BoE now less likely to cut rates next month and only two cuts expected next year, it is questionable whether there is a strong fundamental reason for further significant losses by cable.
The price of GBPUSD is still in the area of the 50% monthly Fibonacci retracement, which seems to be quite a strong support. An attempt to move below $1.26 was rejected with some strength on November 15th, but $1.27 seems to be a significant local resistance. For a major forex pair, cable's movements have been quite dramatic in the last few months.
GBPUSD Chart Analysis
The slow stochastic has produced an oversold signal after its crossover on November 18th. This suggests that there is still some buying potential for GBPUSD in the short term. However, if the price interacts with $1.27 and breaks above, one might expect a pause before the next possible movement lower.
In the short term, selling looks more risky than buying unless there are significant surprises from upcoming data. It would be unlikely to see the price move that far below $1.23 on the weekly chart before the end of the year. If the pound-yen's uptrend continues, a reversal of the downtrend also appears possible.
GBPJPY's Performance
Compared to cable, the pound's performance against the yen in the third quarter so far has been much better. The Bank of Japan's governor Kazuo Ueda reiterated recently that any upcoming further rate hikes would be gradual and according to economic conditions. ¥205, corresponding to about ¥160 for dollar-yen, might be the area of further governmental intervention.
However, this is not likely to affect GBPJPY in the near future. ¥195 was an important resistance and technical reference in late September and much of last month, and seems likely to continue as a key area. This coincides with the value area between the 50 SMA from Bands and the 100 SMA.
GBPJPY Chart Analysis
The current situation favors the carry trade quite strongly since the differential is 4.5%, which seems unlikely to change drastically within the next several months at least. The next significant move up, if it occurs, probably depends on the return of higher volume, which could be in the middle of December around the British job report and the BoE's meeting.
In conclusion, while the UK economy has been experiencing a series of disappointing economic indicators, the pound's performance against major currencies is likely to depend on upcoming data. The probability of a recession in 2025 appears higher for the UK than for other broadly equivalent countries. As a result, it is expected that the BoE will reevaluate its current policy cycle and may be more inclined to cut interest rates.
The charts for GBPUSD and GBPJPY suggest that there is still some buying potential for the pound in the short term. However, if the price interacts with $1.27 and breaks above, one might expect a pause before the next possible movement lower. The pound-yen's uptrend continues, but a reversal of the downtrend also appears possible.
Ultimately, it is essential to consider the broader context of economic conditions, inflation, and interest rates when analyzing the performance of the pound against major currencies.