Will UK GDP breathe life into the pound?

October 25, 2017 10:06 AM

Sterling tumbled against the dollar on Tuesday, after cautious comments from Bank of England Deputy Governor, Jon Cunliffe, rattled market expectations of an interest rate hike next month.

Speaking to the Western Mail, Cunliffe stated that a rate hike in November was an “open question”, and declared that “the economy clearly slowed this year”. The fact the British Pound found itself exposed to downside losses following his statements, continues to highlight how the currency remains extremely sensitive to monetary policy speculation.

Today’s main risk event for the Pound will be the preliminary UK GDP report this morning, which is expected to show that the economy expanded 0.3% in the third quarter of 2017. With November’s BoE policy meeting around the corner, a positive GDP figure that meets or exceeds market expectations is likely to give the thumbs up to the central bank to raise rates.

Overall, October is shaping up to be a painful trading month for Sterling, especially in light of deteriorating economic fundamentals and slow progress on Brexit talks weighing heavily on the currency. Inflation in the UK has jumped to a five-and-a-half year high at 3%, while wage growth remains subdued. With households feeling the squeeze as wage growth continues to fall behind inflation, concerns remain elevated over the sustainability of the UK’s consumer-driven economic growth.

While markets are still widely expecting that the Bank of England will proceed with raising rates by +25 basis points in November to tame inflation, there is a suspicion that this may be a dovish hike. With the unsavory cocktail of soft economic fundamentals and Brexit uncertainty still weighing on sentiment, the future path for interest rates beyond November is open to question.

From a technical standpoint, the British pound/U.S. dollar (GBP/USD) currency pair is turning increasingly bearish on the daily charts. Prices are currently trading below the 50 Simple Moving Average (SMA), while the MACD has also crossed to the downside. Previous support at 1.3150 may transform into a dynamic resistance, that encourages a further decline towards 1.3050. In an alternative scenario, a breakout back above 1.3230 may inspire bulls to target 1.3300.

Commodity spotlight – Gold
Gold bears were offered ample support in the form of a firmer dollar on Wednesday morning, as the yellow metal dipped towards $1271.50.

It seems that investor appetite for riskier assets revived after optimism was renewed over President Trump’s proposed tax reforms, and this continues to reduce the metals safe-haven appeal. With speculation in the air over John Taylor, who is seen as a hawk that will potentially become the next Fed Chair head, gold, which is zero-yielding, could find itself under further selling pressure. Focusing on the technical picture, the metal remains bearish on the daily charts, as prices are currently below the 50 Simple Moving Average. Sustained weakness below $1280 may open a path lower towards $1267. A solid breakdown and daily close below the $1267 level could inspire bears to target $1260 and $1250, respectively.

About the Author

Lukman Otunuga is an FXTM research analyst