UK Data Disappoints
GBP has been back under selling pressure again this week as the latest data highlight further economic weakness.
Monthly GDP figures released yesterday showed the UK economy shrank by 0.3% in December. This was far worse than the expected 0% reading the market was looking for.
On an annual basis, the economy grew just 0.6%, marking its slowest pace of growth since 2012. Alongside this, manufacturing production came in at -1.7% over the month, versus an expected decline of -0.3%.
Carney Warns of Rate Cut Risk
The data comes just days after BOE Governor Mark Carney took traders by surprise as he warned that the BOE might be forced to cut rates, despite the UK PM agreeing on a Brexit deal.
Get our Weekly Commitment of Traders Report: - See where the biggest traders (Hedge Funds and Commercial Hedgers) are positioned in the futures markets on a weekly basis.
Get Our Free Metatrader 4 Indicators - Put Our Free MetaTrader 4 Custom Indicators on your charts when you join our Weekly Newsletter
Carney had previously said that the BOE projected that the UK economy would rebound firmly over 2020 as businesses and consumers reacted to the removal of uncertainty around Brexit.
However, speaking last week, Carney warned that such a pickup might not materialize. And, given the subdued growth seen in the economy, easing could be necessary.
January Easing Looks Likely
In terms of the timing of this easing, with Carney due to hand the BOE governorship over to Andrew Bailey in March, it looks increasingly likely that Carney could ease before then.
As such, there is now a heightened risk of a BOE rate cut at the upcoming January meeting. This would be ahead of the January 31st Brexit date, as leaving it until Bailey has taken over might be a little too long.
Some Hope For UK Economy?
It is worth noting that the GDP data refers to the final period ahead of the UK general election last month. Since then, there are some signs that the pickup is starting to take place.
The recent Services PMI reading came in at its highest level since 2018 last month. However, it was still only back at the 50 level. Looking ahead, there are fears that Johnson’s refusal to extend the UK/EU trade negotiations deadline of December 31st could fuel further uncertainty among businesses.
Johnson Under Pressure over Deal Deadline
Many names from across the political divide have expressed their view that eleven months is not long enough to agree on a trade deal.
This week, Conservative party grandee Peter Bottomley, Father of the House of Lords, warned that failure to agree on a trade deal with the EU could cause an economic contraction by as much as 10%.
Traders will be keeping an eye on the progress of talks going forward as well as for any signs that Johnson might shift his view on extending the deadline date if a deal does not look achievable in the current timeframe.
The reversal lower in GBPUSD looks close to confirming a lower high against the 1.35 post-elections high. Price has broken back below the 1.3014 level and is now challenging the local bullish trend line. A break here would put the focus on a move back down to the 1.2780 level next. Looking further out, price could trade down as low as the 1.2578 level which could be a potential right shoulder of a large, longer-term inverse head and shoulders pattern.