GBP/USD: UK economic growth report, IMF forecast, and general uncertainty
October 12, 2023 1:25 pm
The GBP/USD currency pair reacted weakly to today’s report on the growth of the British economy. The release was contradictory, but the GBP/USD pair literally stood still—both sellers and buyers are in a state of standstill.
Such passivity and caution may be related to the anticipation of another report on U.S. inflation. Yesterday, the Producer Price Index (PPI) was released, which exceeded expectations and reflected an acceleration in inflation. Today, we will learn the Consumer Price Index (CPI). If this release also lands in the “green zone,” the dollar may remind us of its presence, waking up from a heavy knockout blow.
The Federal Reserve dealt a blow to the greenback as it expressed doubts about the necessity of further tightening monetary policy. For the second week in a row, Federal Reserve members have been stating, one after another, that the regulator may not need additional rounds of interest rate hikes. But if CPI accelerates in the wake of PPI in September, this fact will be a serious counterbalance to the “dovish” comments from Federal Reserve representatives. Therefore, traders are being cautious ahead of the key release of the week.
Now, let’s return to events in the United Kingdom. According to today’s data, the UK’s GDP increased by 0.2% in August on a monthly basis, after a 0.6% contraction in the previous month. In quarterly terms, the British economy expanded by 0.3%, the strongest result since May 2022. It’s worth noting that this report met the forecast level, fully justifying the expectations of most experts.
This can’t be said for other macroeconomic indicators published today. For instance, in monthly terms, industrial production decreased by 0.7%, against an expected decline of 0.2%. On an annual basis, the indicator reached 1.3%, falling short of the 1.7% growth forecast. The volume of manufacturing production dropped by 0.8% MoM in August, against a predicted decline of 0.3%.
In other words, the overall result is not impressive despite the actual GDP growth. As an initial reaction, the GBP/USD pair dropped by 40 points but remained on the border between the 22nd and 23rd figures.
It’s worth noting that the pound is now “holding its ground,” not only due to the dollar’s weakness. Unexpectedly, the International Monetary Fund (IMF) came to the aid of the British currency, forecasting further tightening of monetary policy in the UK. According to the published forecast, the Bank of England will have to raise interest rates again “due to persistent inflation in the country.” According to the IMF’s experts, inflation in the UK will reach 7.7% in 2023. However, they also noted that despite high inflation, the UK’s economic growth is sluggish. According to IMF’s estimates, the country’s GDP will increase by approximately 0.6% next year, which is lower than the previous forecast of 1%.
The IMF report notes that such a weak forecast reflects the necessity for the Bank of England to maintain the interest rate at a high level and possibly further tighten monetary policy to curb still-high inflation rates and the consequences of the sharp increase in energy prices in 2022.
It’s worth mentioning that the Bank of England, in its last meeting, kept the interest rate unchanged but allowed for further tightening of monetary policy. According to BoE Governor Andrew Bailey, additional interest rate hikes will be necessary if there are signs of “more sustainable inflationary pressure.” He also promised that the rate will be maintained “at a sufficiently high level” for an extended period.
All of this indicates that the fate of the pound depends to a large extent on the dynamics of key inflation indicators. Next week (October 18), the UK will release the Consumer Price Index (September value), the Retail Price Index, and the Producer Price Index. If these indicators reflect an acceleration in inflation, the question of a rate hike by the Bank of England will return to the agenda, especially in light of the clear “preview” from the IMF.
But until that moment, GBP/USD will obediently follow the greenback.
In this way, the overall situation for the pair carries an uncertain nature. It can be assumed that in the near future—until the data on British inflation is published—the GBP/USD pair will continue to “mirror” the dynamics of the U.S. Dollar Index. In the face of such uncertainty, buying and selling the pair carries risks. Note that despite the strong price increase over the past week, the GBP/USD bulls were unable to surpass the resistance level of 1.2340 (upper Bollinger Bands line on the four-hour chart). However, bears were also unable to push the price below 1.2260 (the middle Bollinger Bands line on the same timeframe). In other words, the pair’s growth has stalled, but sellers couldn’t seize the initiative. In such uncertain conditions, it is most advisable to stay out of the market.
The material has been provided by InstaForex Company – www.instaforex.com
The GBP/USD currency pair reacted weakly to today’s report on the growth of the British economy. The release was contradictory, but the GBP/USD pair literally stood still—both sellers and buyers are in a state of standstill.
Such passivity and caution may be related to the anticipation of another report on U.S. inflation. Yesterday, the Producer Price Index (PPI) was released, which exceeded expectations and reflected an acceleration in inflation. Today, we will learn the Consumer Price Index (CPI). If this release also lands in the “green zone,” the dollar may remind us of its presence, waking up from a heavy knockout blow.
The Federal Reserve dealt a blow to the greenback as it expressed doubts about the necessity of further tightening monetary policy. For the second week in a row, Federal Reserve members have been stating, one after another, that the regulator may not need additional rounds of interest rate hikes. But if CPI accelerates in the wake of PPI in September, this fact will be a serious counterbalance to the “dovish” comments from Federal Reserve representatives. Therefore, traders are being cautious ahead of the key release of the week.
Now, let’s return to events in the United Kingdom. According to today’s data, the UK’s GDP increased by 0.2% in August on a monthly basis, after a 0.6% contraction in the previous month. In quarterly terms, the British economy expanded by 0.3%, the strongest result since May 2022. It’s worth noting that this report met the forecast level, fully justifying the expectations of most experts.
This can’t be said for other macroeconomic indicators published today. For instance, in monthly terms, industrial production decreased by 0.7%, against an expected decline of 0.2%. On an annual basis, the indicator reached 1.3%, falling short of the 1.7% growth forecast. The volume of manufacturing production dropped by 0.8% MoM in August, against a predicted decline of 0.3%.
In other words, the overall result is not impressive despite the actual GDP growth. As an initial reaction, the GBP/USD pair dropped by 40 points but remained on the border between the 22nd and 23rd figures.
It’s worth noting that the pound is now “holding its ground,” not only due to the dollar’s weakness. Unexpectedly, the International Monetary Fund (IMF) came to the aid of the British currency, forecasting further tightening of monetary policy in the UK. According to the published forecast, the Bank of England will have to raise interest rates again “due to persistent inflation in the country.” According to the IMF’s experts, inflation in the UK will reach 7.7% in 2023. However, they also noted that despite high inflation, the UK’s economic growth is sluggish. According to IMF’s estimates, the country’s GDP will increase by approximately 0.6% next year, which is lower than the previous forecast of 1%.
The IMF report notes that such a weak forecast reflects the necessity for the Bank of England to maintain the interest rate at a high level and possibly further tighten monetary policy to curb still-high inflation rates and the consequences of the sharp increase in energy prices in 2022.
It’s worth mentioning that the Bank of England, in its last meeting, kept the interest rate unchanged but allowed for further tightening of monetary policy. According to BoE Governor Andrew Bailey, additional interest rate hikes will be necessary if there are signs of “more sustainable inflationary pressure.” He also promised that the rate will be maintained “at a sufficiently high level” for an extended period.
All of this indicates that the fate of the pound depends to a large extent on the dynamics of key inflation indicators. Next week (October 18), the UK will release the Consumer Price Index (September value), the Retail Price Index, and the Producer Price Index. If these indicators reflect an acceleration in inflation, the question of a rate hike by the Bank of England will return to the agenda, especially in light of the clear “preview” from the IMF.
But until that moment, GBP/USD will obediently follow the greenback.
In this way, the overall situation for the pair carries an uncertain nature. It can be assumed that in the near future—until the data on British inflation is published—the GBP/USD pair will continue to “mirror” the dynamics of the U.S. Dollar Index. In the face of such uncertainty, buying and selling the pair carries risks. Note that despite the strong price increase over the past week, the GBP/USD bulls were unable to surpass the resistance level of 1.2340 (upper Bollinger Bands line on the four-hour chart). However, bears were also unable to push the price below 1.2260 (the middle Bollinger Bands line on the same timeframe). In other words, the pair’s growth has stalled, but sellers couldn’t seize the initiative. In such uncertain conditions, it is most advisable to stay out of the market.
The material has been provided by InstaForex Company – www.instaforex.com
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