GBP/USD Still Having Problems as Data Fuel UK Recession Worries

Market Analytics and Considerations

Key points

• On Thursday, GBP/USD experienced its worst decline in six weeks.
• Due to Friday’s poor UK retail statistics, it fell even more.
• Gains since the September low are in jeopardy.

The British pound is expected to conclude the week under significant pressure against the US dollar after weak economic statistics on Friday stoked concerns about a possible national economic recession.

Base rates reached levels not seen since 2008 (3.5%) on Thursday as a result of the Bank of England’s 0.5% percentage point interest rate increase. However, even that was insufficient to stop the greatest daily decline in GBP/USD in the previous six weeks, illustrating the predicament wherein the Sterling found itself.

Even though six of the nine members of the Monetary Policy Committee in London voted in support of it and one additional member sought stricter action, the market perceived the move as a “dovish” rate hike.

At first glance, this divergence does not imply that the Bank is willing to delay further rate increases. Indeed, among central bankers, Bank of England Governor Andrew Bailey stood out for speculating that there may be some reason to be optimistic about a deceleration in inflation. But even as he did so, he made the point that any further rate increases would probably still be justified given how tight local labor circumstances are. Nevertheless, the market made its decision, and the pound accordingly declined.

On Friday, it was revealed that neither the World Cup nor Black Friday deals had persuaded UK shoppers to part with the meagre amount of money that had been left over after inflation. According to official data, unit sales declined 0.4% on a monthly basis in November, worse than the 0.3% decline predicted. Consumer confidence, according to market researchers GfK, improved a little this month but is still very weak.

The Purchasing Managers Index statistics for December contained a little bit better news. They revealed that the industrial sector had a little better month than the dominant service sector, which was still expanding.

The markets are currently anticipating US PMI data, which is expected to become the day’s most important data point.

Technical Viewpoint

GBP/USD successfully broke through an upward trendline that had originally occupied the bears’ fervor in check for 5 weeks as of Thursday’s daily closing. The pair is now clearly under downside pressure, and psychological support at 1.20 may seem alluring. It’s interesting to observe that a challenge of this support would now exert pressure on the rising trendline from of the trough of October 26. Although they are not in immediate danger, the low of $1.1164 on November 3 must be vigorously guarded by sterling bulls in order to prevent a medium-term repeat of the lows reached on October 26.

The 200-day moving average of the market, which is nearer at hand, can offer modest short-term support. As Friday progresses, it closes at $1.2164 and is definitely worthwhile to keep an eye on both daily and weekly.

Daily SMA Estimates