GBP USD - FUNDAMENTAL ANALYSISPound Sterling briefly dipped after the GDP data on Friday, but still found support on dips with GBP/USD around 1.2530 and GBP/EUR at 1.1475.
The Pound to Dollar (GBP/USD) exchange rate strengthened to 1.2640 in an immediate response to the Bank of England policy decision on Thursday.
There was, however, a notable reversal later in the session as risk appetite deteriorated and the dollar regained territory.
In this environment, GBP/USD posted sharp losses to lows at 1.2500.
Risk conditions will remain an important element. Carl Hammer, chief strategist at SEB commented; "We are entering a more defensive state generally."
Adam Cole, chief currency strategist at RBC Capital Markets, expects choppy trading rather than sustained dollar depreciation. He added; "We're not convinced that this is a sustainable trend yet. We'll have periods when the dollar does well and the dollar does badly."
Mixed GDP data, UK Lags in Global Terms
The latest GDP data recorded a 0.3% decline for March compared with expectations of no change and following no change in February.
The first quarter, however, recorded 0.1% growth and in line with expectations which means that the UK has again avoided a technical recession.
Services declined 0.5% for March after a 0.1% retreat in February with output in consumer-facing services dipping 0.8% on the month.
Production output increased 0.7%for the month with 0.2% growth in construction output.
According to Darren Morgan from the ONS; “The fall in March was driven by widespread decreases across the services sector. Despite the launch of new number plates, cars sales were low by historic standards – continuing the trend seen since the start of the pandemic – with warehousing, distribution and retail also having a poor month.”
He added; “These falls were partially offset by a strong month for manufacturing as well as growth in gas production and distribution and also in construction.”
The ONS estimated that GDP was 0.5% below the pre-pandemic peak and the worst performance within the G10 area.
Pantheon Macroeconomics economist Samuel Tombs noted that the UK is “still at the bottom of the G7 league table”.
Nevertheless, he added; “at least the magnitude of the underperformance is not increasing relative to other countries in Europe, which have faced a similarly enormous energy price shock.”
RSM UK economist Thomas Pugh, commented; “The 0.1% q/q rise in GDP in Q1 means the UK has probably avoided a recession altogether this year.”
Nevertheless, he added; “The big picture is that the economy is still 0.5% below its pre-pandemic level and is unlikely to regain that level until the end of the year at the earliest.”
According to Victoria Scholar, head of investment at interactive investor; “Stubbornly high inflation, negative real wage growth and general cost of living pressures are weighing on the consumer, and in turn the services industry which is typically a key growth engine for the UK economy.”
Tom Stevenson, personal investing director at Fidelity International also pointed to underlying weakness; "With the key services side of the economy continuing to slow in the face of higher borrowing costs and rising prices, it still feels like we’re walking through treacle."
He added; "With inflation still in double digits, it feels depressingly like a re-run of 1970s stagflation."
KPMG economist Yael Selfin also expressed caution; "While recession is probably no longer on the cards, vulnerabilities resulting from higher borrowing costs and tighter credit are likely to dampen business and household activity this year."
Ben Jones, CBI lead economist Ben Jones was slightly more positive; “The UK economy is proving more resilient than widely expected and it looks increasingly likely that the UK will avoid a recession this year. Underlying momentum appears to be firming, with our surveys showing growth expectations for the quarter ahead creeping back into positive territory for the first time in a year.
ING summarised the situation; “Strip out all of the volatility though, and the economy seems to be reasonably stagnant.”
BoE Debate will Continue
The Bank of England increased interest rates by 25 basis points to 4.50% at the latest policy meeting which was in line with consensus forecasts. The 7-2 vote for the move was also expected as Tenreyro and Dhingra again voted against any rate hike.
The bank now expects positive GDP growth in 2023 and 2024 with no quarters of negative growth. Overall, growth forecasts were revised higher by the largest extent since the bank gained independence in 1997.
The bank also raised inflation forecasts with an important impact from the strong increase in food prices. The CPI inflation rate is now forecast at close to 5.0% at the end of 2023 from 4.0% previously.
According to ING; While we don’t exclude one final June hike, our base case is that we have reached the peak of the BoE tightening cycle as inflation will start to rapidly decelerate this year.”
ING added; “For now, however, there aren’t many convincing reasons to call for GBP underperformance against its main peers in the near term.”
Commerzbank considers that expectations are liable to fluctuate; “In the end future data will be decisive for the BoE’s next rate decision though, in addition to the April inflation data the May data will also be published.”
It added; “If a swift fall were to become obvious here, as the BoE expects, it is likely to refrain from further rate hikes and that would put pressure on Sterling. However, the risk that the BoE will do more has certainly increased since yesterday.”
According to Credit Agricole; “The comments suggested that the BoE outlook whilst not as dire as in February has not improved significantly from the stagflationary scenario that the MPC has been predicting since May 2022.”
UoB expects further GBP/USD losses; “The burst in downward momentum indicates that the downside risk is building quickly. From here, we expect GBP to drop to 1.2445; if it can break below this major support level, it could trigger a rapid decline to 1.2390.”
