UK Q4 GDP growth figures poised to challenge sterling’s rally– Forex News Preview
January 25, 2018 5:26 pm
Sterling is on track to post its best weekly performance against the dollar since September as the currency managed to gain 3.0% in just four days, flying from 1.3900 to 1.4327. Brexit optimism, the dollar’s weakness as well as stronger than expected UK economic indicators were among the catalysts that persuaded investors to increase their net-long positions in the market so far. However, the next challenge for the cable might come on Friday when the Office for National Statistics will release flash GDP growth estimates for the final quarter of 2017.
Looking at forecasts, analysts predict the UK economy to reach the lowest annual growth rate since 2013 in the final quarter of 2017, as a slowdown in consumer spending and business investments seems to be a drag on the country’s economic performance. Particularly they anticipate an expansion of 1.4% y/y compared to 1.7% seen in the previous quarter, while on a quarterly basis, projections are for the measure to remain unchanged at 0.4%. Although Wednesday’s data showed that average earnings in the three months to November (excluding bonuses) edged up to 2.4% y/y, consumers face a squeeze on their purchasing power from an accelerating inflation, which stood at 3.0% y/y in December. Besides that, businesses feel reluctant to spend more on labor payments or allocate money on capital investments as they remain uncertain about how things will wrap up for their activities after the country leaves the EU in March 2019, despite recent news supporting a softer Brexit.
But unlike the above projections, the IMF has recently upgraded its UK 2017 GDP growth forecasts from 1.6% to 1.7%, stating that a weaker pound combined with a strengthening global economy worked for British exporters. Yet, for 2018 and 2019 the fund organization has raised its growth prospects for all major economies except those for the UK, which believes will slow down to 1.5% for each year, as Britons still seek new trade relationships with the EU. Political developments might be a challenge for the economy during the next years as well, since the UK Prime Minister, Theresa May, faced stronger criticism from both Labour and Conservatives following a cabinet reshuffle, with one of the active ministers saying “the reshuffle has significantly reduced the prime minister’s time in office”.
Nevertheless, for the moment sterling continues to gain support from upbeat data and Brexit optimism triggered after the House of Commons approved the Brexit bill which aims to incorporate European laws into British rules to ensure a smoother exit from the block. Stronger than expected GDP growth figures on Friday would give further reasons to the BOE to continue tightening its monetary policy, but the general opinion is that the central bank will rather maintain rates unchanged at its next policy meeting on February 8 as wage growth remains subdued, while households struggle to repay their debts. Even so, sterling/dollar might jump well above the 1.4300 key area with scope to test pre-Brexit levels between 1.4400-1.4700 if data beat expectations. In the alternative scenario, disappointing figures could pressure sterling/dollar down to the 1.4200 handle, whilst a larger downside deviation from forecasts may even drive the pair back to the 1.4100 and 1.4000 key areas.
Sterling is on track to post its best weekly performance against the dollar since September as the currency managed to gain 3.0% in just four days, flying from 1.3900 to 1.4327. Brexit optimism, the dollar’s weakness as well as stronger than expected UK economic indicators were among the catalysts that persuaded investors to increase their net-long positions in the market so far. However, the next challenge for the cable might come on Friday when the Office for National Statistics will release flash GDP growth estimates for the final quarter of 2017.
Looking at forecasts, analysts predict the UK economy to reach the lowest annual growth rate since 2013 in the final quarter of 2017, as a slowdown in consumer spending and business investments seems to be a drag on the country’s economic performance. Particularly they anticipate an expansion of 1.4% y/y compared to 1.7% seen in the previous quarter, while on a quarterly basis, projections are for the measure to remain unchanged at 0.4%. Although Wednesday’s data showed that average earnings in the three months to November (excluding bonuses) edged up to 2.4% y/y, consumers face a squeeze on their purchasing power from an accelerating inflation, which stood at 3.0% y/y in December. Besides that, businesses feel reluctant to spend more on labor payments or allocate money on capital investments as they remain uncertain about how things will wrap up for their activities after the country leaves the EU in March 2019, despite recent news supporting a softer Brexit.
But unlike the above projections, the IMF has recently upgraded its UK 2017 GDP growth forecasts from 1.6% to 1.7%, stating that a weaker pound combined with a strengthening global economy worked for British exporters. Yet, for 2018 and 2019 the fund organization has raised its growth prospects for all major economies except those for the UK, which believes will slow down to 1.5% for each year, as Britons still seek new trade relationships with the EU. Political developments might be a challenge for the economy during the next years as well, since the UK Prime Minister, Theresa May, faced stronger criticism from both Labour and Conservatives following a cabinet reshuffle, with one of the active ministers saying “the reshuffle has significantly reduced the prime minister’s time in office”.
Nevertheless, for the moment sterling continues to gain support from upbeat data and Brexit optimism triggered after the House of Commons approved the Brexit bill which aims to incorporate European laws into British rules to ensure a smoother exit from the block. Stronger than expected GDP growth figures on Friday would give further reasons to the BOE to continue tightening its monetary policy, but the general opinion is that the central bank will rather maintain rates unchanged at its next policy meeting on February 8 as wage growth remains subdued, while households struggle to repay their debts. Even so, sterling/dollar might jump well above the 1.4300 key area with scope to test pre-Brexit levels between 1.4400-1.4700 if data beat expectations. In the alternative scenario, disappointing figures could pressure sterling/dollar down to the 1.4200 handle, whilst a larger downside deviation from forecasts may even drive the pair back to the 1.4100 and 1.4000 key areas.
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