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Pound Sterling rises further after strong UK Q1 GDP report

Article
FXStreet in Market News 12 389204
May 10, 2024 19:40

content provided with permission by FXStreet

  • The Pound Sterling moves higher to 1.2540 on upbeat UK Q1 GDP and March factory data.
  • UK’s Q1 GDP growth suggests that the technical recession in 2023 was shallow.
  • Easing US labor market conditions weigh on the US Dollar.

The Pound Sterling (GBP) extends its upside to 1.2540 in Friday’s London session as the United Kingdom Office for National Statistics (ONS) posted strong preliminary Q1 Gross Domestic Product (GDP) numbers. The agency showed that the economy expanded at a strong rate of 0.6% against expectations of 0.4% after contracting by 0.3% in the last quarter of 2023.

Strong UK GDP growth has suggested that the technical recession observed in the second half of 2023 was shallow. Annually, the UK Q1 GDP expanded by 0.2%, the same pace at which it was contracted earlier. Investors anticipated a stagnant growth on a year-over-year basis. Meanwhile, the monthly GDP growth for March was 0.4%, stronger than the consensus of 0.1% and the prior reading of 0.2%, upwardly revised from 0.1%.

Upbeat GDP growth would allow the Bank of England (BoE) to achieve a ‘soft landing’. BoE Governor Andrew Bailey commented in the press conference after the monetary policy statement that the central bank is confident that inflation will return to target in the coming months. A soft landing is a scenario in which the central bank achieves the price stability without triggering a recession.

Daily digest market movers: Pound Sterling capitalizes on multiple tailwinds

  • The Pound Sterling rises sharply to 1.2540 against the US Dollar (USD) due to upbeat preliminary Q1 GDP growth and strong factory data. Apart from the upbeat Q1 GDP data, the UK ONS showed that monthly Industrial Production rose by 0.2% in March against expectations of a decline of 0.5%. Annually, the Industrial Production grew at a higher pace of 0.5% from the estimates of 0.3%.
  • Monthly Manufacturing Production surprisingly grew by 0.3% as economists anticipated a contraction of 0.4%. Annually, this indicator increased at a stronger pace of 2.3% against expectations of 1.8%.
  • The situation of strong US factory data and easing inflationary pressures is favorable for the Bank of England to bring down interest rates from their current levels of 5.25%. On Thursday, the BoE kept interest rates steady for the sixth straight meeting. However, the overall message from the central bank suggested that the BoE is gradually moving to policy normalization.
  • Out of the nine-members-led Monetary Policy Committee (MPC), BoE policymaker Swati Dhingra and Deputy Governor Dave Ramsden voted for a 25 basis points (bps) rate cut to 5%. Financial markets were divided over Ramsden’s vote as he supported a neutral stance on interest rates in the policy meeting in March. But his commentary in April suggested that he is confident about inflation returning to the 2% target sooner.
  • Also, the commentary from Andrew Bailey on interest rates was more dovish than expected. Bailey didn’t rule out speculation for BoE reducing interest rates from June. He said, “A June bank rate cut is not ruled out or planned”. For the entire year, Bailey said, “It’s possible we will need to cut rates more than currently priced into market rates.”
  • Meanwhile, the US Dollar Index (DXY) has rebounded slightly after a sharp fall to near the crucial support of 105.00. The US Dollar is still under pressure as higher-than-expected individuals claiming jobless benefits for the week ending May 3 deepened concerns over United States labor market strength. The US Department of Labor showed that Initial Jobless Claims were the highest since November 10 week, showing 231K against the consensus of 210K and the prior reading of 209K.
  • Going forward, investors will shift focus to the UK’s labor market data for three months ending March and the US Consumer Price Index (CPI) data for April, which will be published next week.

Technical Analysis: Pound Sterling holds gains above 1.2500

The Pound Sterling advances to 1.2540 due to multiple tailwinds. The GBP/USD pair recovered sharply from 50% Fibonacci retracement (plotted from April 22 low of 1.2299 to May 3 high of 1.2634) near 1.2470. The pair returns above the 20-day Exponential Moving Average (EMA), which trades around 1.2520.

The asset is still below the neckline of the Head and Shoulder (H&S) chart pattern on the daily timeframe. On April 12, the Cable fell sharply after breaking below the neckline of the H&S pattern plotted from December 8 low around 1.2500.

The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, suggesting indecisiveness among market participants.

GDP FAQs

A country’s Gross Domestic Product (GDP) measures the rate of growth of its economy over a given period of time, usually a quarter. The most reliable figures are those that compare GDP to the previous quarter e.g Q2 of 2023 vs Q1 of 2023, or to the same period in the previous year, e.g Q2 of 2023 vs Q2 of 2022. Annualized quarterly GDP figures extrapolate the growth rate of the quarter as if it were constant for the rest of the year. These can be misleading, however, if temporary shocks impact growth in one quarter but are unlikely to last all year – such as happened in the first quarter of 2020 at the outbreak of the covid pandemic, when growth plummeted.

A higher GDP result is generally positive for a nation’s currency as it reflects a growing economy, which is more likely to produce goods and services that can be exported, as well as attracting higher foreign investment. By the same token, when GDP falls it is usually negative for the currency. When an economy grows people tend to spend more, which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation with the side effect of attracting more capital inflows from global investors, thus helping the local currency appreciate.

When an economy grows and GDP is rising, people tend to spend more which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold versus placing the money in a cash deposit account. Therefore, a higher GDP growth rate is usually a bearish factor for Gold price.