Pound Hangs in Balance Ahead of GDP Release

Recent data has supported the pound, but the all-important measure of economic growth to see if the UK can keep its currency up will be the key going forward.

Cable Advances At the Expense of the Dollar

Last week's Fed and BOE meetings left cable on an upward trajectory as the dollar weakened. Neither decision was surprising, but markets had been weighing in more hawkishness from the Fed, and many holdouts for a rate hike at the BOE signalled that there was still substantial support for tightening. Subsequently, the pound recorded its best week this year against the dollar, partly because investors were getting more cautious about the economic outlook for the US, while the UK's economy was already expected to underperform.

The release of Q3 GDP figures for the UK on Friday comes to the fore, with the analyst consensus being 0.0% growth in the quarter, down from 0.2% the prior period. The annual growth rate is expected to remain unchanged at just 0.6% compared to the 4.9% annualised recorded by the US in the same time frame. Given that the consensus is at the dividing line between growth and contraction, the result could outsize the markets if it outperforms or misses. A result below expectations would open the possibility of the UK slipping into a technical recession like Germany. Meanwhile, UK manufacturing production is expected to return to positive, with a monthly growth rate of 0.4% compared to -0.8% prior, which could provide some more optimism for the British economy even if the headline figure disappoints.

The Path Forward is Even, For Now

Money markets are now pricing in a 50-50 chance that the BOE will hold rates at the current level through the middle of the next year. BOE Governor Andrew Bailey pushed back on initial market speculation that a rate hike might happen sooner, saying it was too early to discuss cutting rates. After his most recent intervention, the first rate cut is fully priced in for August next year, assuming the UK economy continues to limp over the same period.

Getting the economy going is likely to be the main challenge to getting the pound to strengthen against its peers, particularly regarding cable, as the UK is set to underperform against its peers. Economic modelling suggests it's the lack of public investment that is preventing stronger growth, and the King's Speech earlier this week didn't appear to announce any major changes in that area ahead of the final legislative session before voters go to the polls. Once again, the upward movement for cable might rely more on weakness in the greenback than strength in sterling.

Cable Failed to Move Outside Flag

Despite trading higher than last week, failure to break past the upper channel trendline and reversing at $1.2430 brings a flag pattern into focus. It could continue to trade within the flag if the support near $1.21 holds firm but is unlikely to move back up if the regional low at $1.2040 succumbs. Conversely, if prices remain above $1.22, the chances of advancing towards $1.250 will increase, but not before the short-term resistance at $1.2340 is reclaimed.

Source: SpreadEx GBPUSD

Key Takeaways

The pound has gained against the dollar as markets reacted to central banks' recent decisions, and the UK is expected to report no GDP growth this quarter, which would raise concerns of a recession. While UK manufacturing is forecast to return to growth, it may not be enough to boost the pound unless the UK achieves stronger economic growth. Money markets now see a 50-50 chance of the BOE holding steady through mid-2023, with the first rate cut now priced in for September 2023. For now, an upward movement in the pound-dollar rate may rely more on dollar weakness than UK growth strength, as the King's Speech showed no major growth changes.