Pound Sterling faces pressure on modest UK Q3 GDP growth
- The Pound Sterling has further weakened due to softer-than-projected flash UK Q3 GDP growth data.
- The UK economy expanded 0.1% in the third quarter, slower than estimates of 0.2%.
- The US government reopens after a 43-day shutdown, the longest in history.
The Pound Sterling (GBP) continues to underperform its major currency peers as weaker-than-projected United Kingdom (UK) preliminary Gross Domestic Product (GDP) data has prompted economic concerns further.
On Tuesday, the UK economic uncertainty escalated after the release of the labour market data for the three months ending September, which showed that the Unemployment Rate accelerated to 5%, the highest level seen since February 2021.
During the European session, the UK Office for National Statistics (ONS) reported that the economy expanded 0.1% in the third quarter of the year, slower than estimates of 0.2% and the 0.3% growth seen in the second quarter. On an annualized basis, the UK economy grew at a moderate pace of 1.3%, against expectations and the prior release of 1.4%.
Month-on-month, the UK economy contracted by 0.1% in September, while it was expected to remain flat. Meanwhile, Manufacturing and Industrial Production have declined at a stronger-than-projected pace in September after rising in August. On month, the Manufacturing and Industrial Production dropped by 1.7% and 2%, respectively.
Signs of slowing UK economic growth and declining factory activity would further intensify market speculation that the Bank of England (BoE) will cut interest rates at the December monetary policy meeting, which accelerated after soft job market data.
On the political front, several British media outlets have stated that the allies of Prime Minister Kier Starmer are conspiring to oust him ahead of the Autumn Budget, which is scheduled to be unveiled later this month. Starmer’s oust at times when the UK economy is facing higher fiscal debt risks would lead to political instability, an event that might boost gilt yields.
Daily digest market movers: US government reopens after a 43-day shutdown
- The Pound Sterling trades with caution near 1.3130 against the US Dollar (USD) during the European trading session on Thursday. The GBP/USD pair is broadly under pressure as the Pound Sterling underperforms due to weak UK data.
- Meanwhile, the US Dollar ticks down as traders demonstrate confidence that the Federal Reserve (Fed) will cut interest rates again at the December monetary policy meeting.
- During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades near the 10-day low around 99.30.
- According to the CME FedWatch tool, the probability of the Fed cutting interest rates by 25 basis points (bps) to 3.50%-3.75% in the December meeting is 67%. This will be the third interest rate cut by the Fed in a row.
- The latest Reuters poll on the Fed’s interest rate decision for the December meeting shows that 80% of economists predicted a 25-bps interest rate reduction, citing weak job market conditions.
- On Wednesday, Boston Fed Bank President Susan Collins stressed the need to loosen monetary conditions further amid escalating job market risks. “It is prudent to normalize rates a bit further in 2025 as the downside risks to the labor market have likely risen,” Collins said at the Greater Boston Chamber of Commerce.
- On the political front, the US President Donald Trump signed the spending bill on Wednesday to reopen the government after what has been the longest shutdown ever, lasting 43 days, BBC News reported.
Technical Analysis: Pound Sterling sees more downside as it stays below 200-day EMA
The Pound Sterling trades inside the previous day’s trading range around 1.3130 against the US Dollar on Thursday. The overall trend of the pair remains bearish as it trades below the 200-day Exponential Moving Average (EMA), which is around 1.3261.
The 14-day Relative Strength Index (RSI) struggles to return above 40.00. A fresh bearish momentum would emerge if the RSI resumes its downside journey.
Looking down, the April low near 1.2700 will act as a key support zone. On the upside, the October 28 high around 1.3370 will act as a key barrier.
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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