Pound Sterling weakens on UK's stagnant GDP, weak factory data, risk-aversion mood

Pound Sterling faces pressure due to multiple headwinds.
The UK economy remained stagnant in Q3 while economists forecasted a 0.1% contraction.
Business investment by UK firms fell sharply in Q3 due to higher borrowing costs.

The Pound Sterling (GBP) is expected to continue its losing streak for the fifth trading session as the market participants anticipate a sharp slowdown in the United Kingdom economy. The British economy managed to avoid de-growth in the third quarter of 2023 but remained stagnant as firms were reluctant to hire job-seekers on a permanent basis and plans for capacity expansion were scrapped due to poor demand outlook. Higher interest rates by the Bank of England (BoE) and stubborn price pressure have squeezed the budgets of households. UK Chancellor Jeremy Hunt said, after the release of the Q3 GDP, that high inflation is the single greatest barrier to economic growth.

Apart from the economic turmoil, dovish expectations for the interest rate outlook from BoE policymakers and dismal market sentiment are weighing on the Pound Sterling. BoE Chief Economist Huw Pill said the possibility of rate cuts in mid-2024 “doesn’t seem totally unreasonable” due to fears of an excessive slowdown. The market mood turned downbeat after Federal Reserve (Fed) Chair Jerome Powell said the current level of interest rates is not adequate to bring down inflation to 2%.

Daily Digest Market Movers: Pound Sterling remains on backfoot on risk-off mood

Pound Sterling faces pressure as the UK GDP in the third quarter remained stagnant while investors forecasted a contraction by 0.1%. In the second quarter, the economy grew by 0.2%.
Preliminary GDP grew at a steady pace of 0.6% YoY in Q3, marginally higher than expectations of 0.5%. The monthly growth rate in September was similar to August's GDP of 0.2%. Investors had anticipated a decline of 0.1%.
In addition to Q3 GDP data, the Office for National Statistics (ONS) has reported factory data for September.
Monthly Manufacturing Production grew at a slower pace of 0.1% in September against expectations of 0.3%. In August, output from manufacturing activities contracted by 0.7%. The annual Manufacturing Production rose by 3.0% versus. expectations of 3.1%.
Industrial Production remained stagnant in September, on a monthly basis, against a 0.5% contraction in August. Economists forecasted a growth rate of 0.1%. The annual data rose by 1.5%, outperforming expectations of 1.1%.
Preliminary Total Business Investment contracted significantly by 4.2% in Q3 against expectations of a 3.5% decline. In the second quarter, business investment grew by 4.1%. Investment by firms in capacity expansion fell after a two-quarter increase as higher borrowing costs have forced them to postpone their expansion plans.
Though the UK economy managed to avoid a decline in growth in the July-September quarter, chances of an excessive slowdown in the UK economy are high as firms hesitate to widen the scale of operations and hire permanent payrolls due to a sharp decline in consumer spending.
The Pound Sterling remains under pressure as dovish expectations for interest rates by the Bank of England (BoE) grew sharply after commentary from Chief Economist Huw Pill.
Huw Pill warned that higher interest rates for a sufficiently longer period to tame inflationary pressures could result in an excessive slowdown in the economy. While discussing cutting rates, Pill said that he expects rate cuts in mid-2024.
In the latest forecasts, the BoE said that the economy will be stagnant in the next two years and a mere 0.1% growth will be seen in 2026.
After factory data, investors will shift focus to the labor market and inflation data, which will be published next week.
Meanwhile, the US Dollar Index (DXY) aims to extend recovery above the immediate resistance of 106.00, supported by hawkish remarks on interest rate guidance by Federal Reserve (Fed) Chair Jerome Powell.
Jerome Powell leaned towards raising interest rates further, claiming the battle against stubborn inflation was far from over.
Apart from Jerome Powell, interim Bank of St. Louis Federal Reserve President Kathleen O’Neill Paese said "It would be unwise to suggest that further rate hikes are off the table".
This week, commentaries from Fed policymakers remained in the spotlight due to the light economic calendar. Next week, the US inflation data will be keenly watched.

Technical Analysis: Pound Sterling trades close to 1.2200

Pound Sterling trades at a make-or-break level near the breakout region of the symmetrical triangle chart pattern formed on the daily timeframe. The GBP/USD pair hovers around the 20-day Exponential Moving Average (EMA), which trades around 1.2230. The broader appeal for the Cable is bearish as the 200-day EMA has started sloping south.

GDP FAQs

What is GDP and how is it recorded?

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.

How does GDP influence currencies?

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.

How does higher GDP impact the price of Gold?

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.

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