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Investors await UoM sentiment, UK GDP

Briefs

  • GBP/USD has lost two consecutive weekly gains following the BOE’s dovish rise.
  • The UK GDP is expected to have decreased by 0.1% in the second quarter.
  • Services declined by 0.4% in terms of output.
  • Acceptance above 1.2200 is important for GBP bulls to keep the rally going.

GBP/USD bulls were exhausted after two weeks of consecutive weekly gains and concluded the week in the red. Cable’s underperformance may be linked to the Bank of England’s (BOE) dovish rate hike and lingering recession fears.

The encouraging US July jobs report on Friday underscored cable buyers’ apprehension ahead of the important US inflation and UK quarterly GDP announcements on Friday.

GBP/USD: Week’s Review

The US dollar fell more at the start of the week on Monday, as risk flows dominated despite a reduced likelihood of a 75 basis point Fed rate hike in September. GBP/USD extended last week’s 150-pip advances to 1.2293, the highest level in four weeks, ahead of the BOE’s 50-bps rate hike to battle inflation.

However, the dollar regained its strength by mid-week, as recession fears intensified alongside growing geopolitical tensions. The dollar’s safe-haven bids revived ahead of US House of Representatives Speaker Nancy Pelosi’s visit to Taiwan, despite China’s warning against the visit.

Meanwhile, markets weighed the mixed US ISM Manufacturing and Services PMI data, as Treasury yields remained low, indicating an impending recession.

The hawkish comments from Fed officials Charles Evans, James Bullard, and Mary Daly increased the probability of a 75 basis point hike in September back to about 50%, providing much-needed support to dollar bulls.

Furthermore, positive US corporate earnings results reduced recession fears, although markets expected the Fed to continue tightening through the rest of the year. GBP/USD tested the 1.2100 demand region ahead of the BOE rate hike decision on Thursday.

The pound was further weakened by disappointing UK data, which revealed that the country’s economic activity service sector expanded at its slowest pace in 17 months. The final S&P Services PMI in the United Kingdom fell to 52.6 in July from 54.3 in June, compared to 53.3 expected.

The currency pair came under further selling pressure after the pound weakened in response to the Bank of England’s forecast of a recession later this year. The BOE hiked benchmark interest rates by 50 basis points to 1.75%, as predicted, but stated that it is not on a predetermined tightening course. By October, inflation projections had been raised to above 13%.

Cable fell to a five-day low of 1.2065 following the dovish BOE rate hike, but recovered some of its losses as the US dollar fell alongside rates after weekly initial jobless claims surged by 260K, lingering near an eight-month high.

On the penultimate trading day of the week, the pair fell back into the red due to pre-NFP jitters. With the US Bureau of Labor Statistics announcing a 528,000 increase in NFP, versus the market’s assumption of 250,000, the dollar gained momentum, forcing the GBP/USD to fall further toward 1.2000. According to the report’s additional statistics, yearly salary inflation remained stable at 5.2%. 

Week Ahead After Q2 GDP m/m Release

London markets were set to open flat on Friday as investors digested the latest UK GDP figures. The FTSE 100 was expected to open unchanged at 7,466 points.

According to the preliminary estimate, the UK gross domestic product (GDP) fell by 0.1% in Quarter 2 (April to June) 2022.

In terms of output, services declined by 0.4% in Quarter 2 2022, with human health and social work activities contributing the most negatively, reflecting a decrease in coronavirus (COVID-19) activities.

In Quarter 2 2022, real household consumption fell 0.2%, offset by a positive contribution from net trade; nonetheless, we continue to advise caution due to recent changes in data gathering affecting EU trade flows.

Monthly estimates released today (12 August 2022) show that GDP fell by 0.6% in June 2022, following a downwardly revised 0.4% increase in May; the Platinum Jubilee and the movement of the May bank holiday resulted in an extra working day in May 2022 and two fewer working days in June 2022; while this had an impact on monthly GDP, it had little impact on quarterly estimates.

The implied GDP deflator increased by 6.0% year on year, principally reflecting a 7.3% increase in the price of family consumption spending, the largest annual household deflator growth rate since 1991.

“Health was the major reason the economy fell,” said ONS director of macroeconomic front Darren Morgan, “as both the test and trace and vaccine programs were cut down, although many merchants also had a poor quarter.” These were largely offset by growth in hotels, bars, hairdressers, and outdoor events throughout the quarter, owing in part to people celebrating the Platinum Jubilee.”

On the macroeconomic front in the United States, the Preliminary UoM Consumer Sentiment and Inflation Expectations data will round up another critical week.

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Author

  • Zahari Rangelov

    Zahari Rangelov is an experienced professional Forex trader and trading mentor with knowledge in technical and fundamental analysis, medium-term trading strategies, risk management and diversification. He has been involved in the foreign exchange markets since 2005, when he opened his first live account in 2007. Currently, Zahari is the Head of Sales & Business Development at TraderFactor's London branch. He provides lectures during webinars and seminars for traders on topics such as; Psychology of market participants’ moods, Investments & speculation with different financial instruments and Automated Expert Advisors & signal providers. Zahari’s success lies in his application of research-backed techniques and practices that have helped him become a successful forex trader, a mentor to many traders, and a respected authority figure within the trading community.