Cable Flirts with 1.30 Ahead of GDP

While cable sterling is capitalising on dollar weakness, it remains unclear whether the UK economy can boost the pound towards last year's highs.

One Country's Tariff is Another's Gain

The cable has been on a tear since the beginning of the year, but it received a substantial boost throughout March and has been knocking at the 1.30 handle this week. Although events in the UK fed into the rally, the primary driver appears to be the dollar's worst start to a year since 2008, as it has declined more than 4% since January. Investors seem nervous about a potential tariff-induced recession, piling into the safety of the US Treasuries, thereby weighing on yields and the greenback.

Given this context, the pound has lagged behind the euro, marking its worst weekly returns in the last two years. While both the UK and the EU have pledged to increase defence spending, which has translated into higher yields on debt as investors price in the risk for already highly indebted countries, British spending is not expected to rise at the same pace. Also, traders are concerned that the economy is not on solid footing, despite the outperformance seen towards the end of last year, with the BOE inclined to ease policy as consumer demand remains weak.

London Awaits Signals from Upcoming Data

The tariff effect is also a factor, as the White House implemented its proposed 25% tariff on steel and aluminium imports from around the globe, prompting retaliation from the EU with levies on an assortment of goods imported from the US. However, the UK has avoided the tariff issue and will not respond to the latest incident. This is partly because only 5% of the UK's exports of those materials go to the US, but also because Britain has largely avoided the ire of US President Donald Trump as it does not have a significant trade surplus with the US. Meanwhile, the application of tariffs is seen as inflationary, putting pressure on central banks to raise interest rates. With Downing Street not raising taxes on imported goods, the BOE can avoid such pressure, which could weaken the pound.

Friday sees the release of GDP figures for January, which will likely be closely scrutinised to determine if the unexpected growth spurt seen late last year can be maintained or if it will match the "sluggish" projections used by the Bank to justify easing. Monthly GDP growth is expected to slow to 0.1% from 0.4%, but the rolling three-month average is projected to remain elevated at 0.3% compared to 0.1% previously. Then comes the UK trade balance, which is expected to see the deficit expand to $3.5 billion from $2.82 billion a month ago.

Bulls Eye Higher as C&H Plays Out

Cable has broken to a new year-to-date high shy of 1.30 following the completion of a cup-and-handle (C&H) pattern. When measured from the handle peak, the pattern suggests a projection to 1.3050 next if 1.30 gives way to bulls. However, losing the 1.2950 (cap lip) swing may invalidate the upside unless an ending wedge pattern reveals itself. A drop under 1.2925 would expose 1.2865.

Source: SpreadEx / GBPUSD

Key Takeaways

Cable has recently received a boost towards the 1.30 handle on the back of a weaker dollar, but the sustainability of the uptrend hangs on the UK economy's economic health. The upcoming GDP and trade balance data will provide insights into the UK's economic strength and may influence a BOE less worried about the impact of tariffs.