UK GDP data released today underwhelmed as the UK economy shrank by 0.3% for the month of October. Having avoided a contraction during the July-September period it appears the luck has finally run out. The July – September period largely coincided with the UK summer which could in part explain the GDP number posted. The increase in visitors and travel by UK residents largely playing an important part in avoiding a contraction. Following today’s data UK interest rate swaps were fully pricing in 4 cuts of 25bps each in 2024.
The data today only emboldened market participants hope of rate cuts following softer wage growth reported earlier this week. Inflation in the UK remains slightly more stubborn particularly in the services sector which remains sticky. Taking that into account market participants are expecting the BoE to begin rate cuts later than its peers but expect them to be more aggressive. As it stands market participants are expecting the ECB to begin rate cuts in May while the BoE is expected to begin in June.
At present it just seems that the UK is seeing a slower drop-off in inflation exactly the same problem the country faced when inflation was on its way up. The best example being energy prices which rose more slowly in the UK due to regulations but the same seems to be happening now that energy prices are on their way down. Food prices tell a similar story.
The GBP is likely to face selling pressure moving forward and could struggle in the weeks ahead as the UK faces a few more challenges than its peers. Tomorrow we will hear from the Bank of England, and it will be interesting to gauge where the BoE stand in comparison to the Federal Reserve who predict 75bps of rate cuts in 2024.
PRICE ACTION AND POTENTIAL SETUPS
From a technical perspective, EURGBP broke the range it had been caught in for 7 trading days. I did write about a breakout in my previous GBP Price Action piece last week where did mention a daily candle close above the range will see an accelerated move toward the MAs providing resistance around the 0.8630-0.8640 handles.
There is also the 200-day MA which rests at the 0.8660 area. There is a lot of resistance all the way up to 0.8720 area and this could prove a tough nut to crack for GBP bulls.
GBPAUD has been rangebound since the Middle of September but is attempting a break below the range today. We have had two previous attempts to break lower with a daily candle close below opening up a larger move to the downside. The next key support area rests around the 1.8500 handle which is 400-odd pips away.
If price does fail to close below today it could still do so tomorrow following the BoE meeting. The 200-day MA will provide resistance as it rests just above the 1.9000 handle while another hurdle rests at the 1.9110 mark.
Key Levels to Keep an Eye On:
GBPUSD bounced of a key confluence area today and helped by and large with the Fed confession that 75bps of cuts may arrive in 2024. This saw a huge selloff in the US Dollar in the aftermath as market participants once again appear to be going above and beyond. Markets are anticipating more aggressive cuts than that which the Fed are currently anticipating with Fed swaps pricing in as much as 140bps of cuts.
This pushed GBPUSD back above the 1.2600 level and on course for a massive hammer candlestick close. Key resistance rests just above at the 1.2680 handle and it will be interesting to gauge the market reaction and comments by the BoE tomorrow. I expect a huge selloff in the GBP should the BoE adopt a more dovish tone at tomorrow’s meeting which cannot be ruled out given the recent batch of data.
Key Levels to Keep an Eye On: