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UK GDP data may further cool pound rally but bulls might not be done yet – Forex News Preview
March 10, 2021 12:27 pmVideo
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A barrage of UK data will greet traders when European markets open on Friday (07:00 GMT), with the monthly GDP print being the main highlight. Considering that much of Britain was under a strict lockdown in January, the numbers are not anticipated to do the pound any favours, as the currency undergoes a much-needed correction versus the dollar following a relentless rally since October. Nevertheless, the grim figures and the greenback’s fight back are expected to be only a temporary setback for the bulls, who are holding out for better times ahead for the pandemic-stricken economy.
Back in slump territory
It is no secret that the British economy suffered one of the biggest contractions from the virus slump among the rich nations as output collapsed by almost a fifth during the first lockdown. Having managed to reduce the output gap to 6.5% at the end of last year, GDP is expected to have shrunk again in January when a tough new lockdown was imposed on England in an effort to contain the highly contagious new Kent variant of Covid-19.
Forecasts are for a month-on-month drop of 4.9% in GDP in January, which would take the annual decline down to 10.9%. The services sector is expected to have led January’s rout, shrinking by 5.4% m/m.
The predictions for industrial and manufacturing production are somewhat less gloomy. They are forecast to have fallen by 0.6% and 0.8% m/m, respectively. The global manufacturing industry continues to recover strongly from the pandemic fallout, extending its rebound even during the second wave when factories have largely stayed open after adapting to Covid safety guidelines. A smaller trade deficit might also soften the blow on GDP as the lockdown-induced plunge in consumption likely reduced demand for imports in January.
Cable stumbles amid resurgent dollar
But will any of the data matter much for sterling? Probably not. At best, they could amplify existing moves. For example, a big miss in the GDP reading could deepen the pound’s selloff on a risk-off day, while better-than-forecast numbers could give the currency an extra leg up on a positive day. Either way, the lockdown period data is unlikely to alter the bigger upbeat picture. This is especially true when looking at euro/pound and pound/yen but less so for cable.
The pound/dollar uptrend is being tested right now, with prices coming dangerously close to the 50-day moving average (MA). The pair has found strong support in the 138.2% Fibonacci extension of the September downleg around $1.3790. A sustained bounce off this support point would raise the prospect of another test of the $1.40 level, which is proving difficult to reclaim. Failure to do so would diminish the chances of prices surpassing the 3-year top of $1.4235 in the near-term, risking a longer period of consolidation and eventually slipping below the 50-day MA.
UK and US yields power ahead of rivals
The US dollar has come back to life in 2021, being buoyed by similar forces that are fuelling the pound rally. Both nations are ahead in the global vaccination race, spurring investors to foresee an earlier return to normality than their G10 counterparts. However, it is no longer just about vaccines.
The recent selloff in bond markets has prompted a push back by some central banks against the surge in sovereign bond yields, notably those of Australia, New Zealand and the Eurozone. But the Federal Reserve and Bank of England do not see any reason for panic just yet even though 10-year Treasury and gilt yields have risen more exponentially. On the fiscal stimulus front too, the US and UK governments are pumping more cash into their economies than their peers.
Pound may have peaked versus dollar
But as the greenback enjoys a bit of a revival from rising Treasury yields, can the pound stay ahead of the mighty US currency going forward? A lot will depend on whether bond markets settle down and Treasury yields steady, which are mainly contingent on how the Fed rides out this storm. Cable’s ascent could soon reach a climax, if it hasn’t already, should US yields keep on climbing.
Another potential headache for the pound is brewing tensions between the UK and EU. With post-Brexit talks on financial services proceeding very slowly and disagreements over the Northern Ireland protocol endangering the entire Brexit treaty, vaccines might not be able to solve all of the UK’s economic troubles.
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