The GBP/USD exchange rate continued its strong sell-off after last Friday’s UK GDP data and as traders waited for the upcoming Federal Reserve and Bank of England decisions. The pair retreated to a low of 1.2630 on Monday, down from the month-to-date high of 1.2810.
UK economic slowdown
There are signs that the UK economy is not doing well. Data released on Friday showed that the economy contracted by 0.1% in October after contracting by 0.1% in the previous month. It was a weaker slowdown than the median estimate of 0.1%.
This slowdown translated to a year-on-year growth of 1.3%, also lower than the median estimate of 1.6%.
More data showed that the country’s trade deficit widened to over £18 billion in October from £16.32 billion a month earlier. The deficit was also higher than the median estimate of £16 billion.
Another report showed that the UK manufacturing production dropped by 0.6% in October, a smaller drop from the previous minus 1.0%.
Industrial production dropped by 0.7% during the month, while construction output slipped by 0.7% on a YoY basis.
These numbers mean that the economy was still struggling, a trend that may continue in the comig months.
Looking ahead, the Office of National Statistics (ONS) will publish the latest jobs numbers on Tuesday. Economists expect the data to show that the unemployment rate rose from 4.3% in September to 4.6% in October. The average earnings ex bonus is expected to come in at 5.0%. With bonuses, the index is expected to come in from 4.3% to 4.7%.
These numbers will come a day before the ONS publishes the latest consumer price index (CPI) data. Economists polled by Reuters expect the data to show that the headline CPI rose from 2.3% to 2.6%.
Core inflation, which excludes the volatile food and energy prices, is expected to move from 3.3% to 3.6%, a sign that inflation was moving in the wrong direction. It had dropped to below 2% a few months ago.
Therefore, the Bank of England will be in a dilemma on Thursday since the UK has moved into a stagflation period. Stagflation is a situation where the economy is slowing at a time when inflation is rising.
It is a big dilemma becaus a rate cut may stimulate the economy but also lead to higher inflation over time.
Federal Reserve decision ahead
The GBP/USD exchange rate will also react to Wednesday’s Federal Reseve decision. Economists expect that the Fed will slash rates by 0.25%, bringing the year-to-date cuts to 1%.
The Fed is mostly concerned about the labor market at the expense of inflation. Data released this month showed that the unemployment rate rose from 4.1% to 4.2% even as the economy added over 200k jobs. These job additions were mostly because the hurricanes and the Boeing strikes ended.
Like the Bank of England, the Fed is struggling to deal with the stubbornly high inflation rate. Recent data showed that the headline CPI rose to 2.7%, while the core CPI remained unchanged at 3.3%.
Therefore, analysts expect a dovish tilt from the Fed as it cuts rates and points to more cuts in the coming months.
GBP/USD technical analysis
GBP/USD chart by TradingView
The daily chart shows that the GBP/USD exchange rate has dropped to 1.2600, its lowest point since November 7. This decline happened after the pair formed a rising wedge pattern, a popular bearish sign.
The GBP to USD pair has formed a death cross pattern as the 50-day and 200-day Exponential Moving Averages crossed each other. Therefore, the pair will likely continue falling as sellers target the key support at 1.2500.
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