The value of the British pound (GBP) is plummeting against the U.S. dollar (USD). As of this writing, it is trading closer to 1.3420. According to new figures released today by the ONS, the UK’s GDP grew by 0.1% in August. This comes on the heels of a contraction of 0.1% in July. These are the key economic indicators that market analysts are watching closely. They need to know how they would affect the currency pair and larger macroeconomic hopes and fears.
The first resistance in GBP/USD is pin-pointed at the 50-day Exponential Moving Average (EMA), which lies at 1.3451 at the moment. If the pair manages to get above this, the stage may be set for yet another thrilling call for GBP/USD. It could fly above its three-month peak of 1.3726. On the flip side, the psychological support level is at 1.3400, with the nine-day EMA offering a key second line of defense at 1.3390. If it were to break below this level, we could see GBP/USD revisiting its two-month low of 1.3248.
Economic Growth and Currency Fluctuations
The recent GDP figures are critical to driving market expectations about monetary policy and future currency performance. UK August growth modest at 0.1% marks a potential turning point from contraction seen in July. Some analysts are confident this accelerating growth trend will reinsure GBP/USD. If it does, it would reduce the chances of additional interest rate cuts from the Bank of England (BoE) at future monetary policy meetings.
And increasingly, there are calls for these sorts of markets—other measures besides GDP—to take the forefront. In August, the UK’s industrial production is forecast to rise by 0.2% m/m. That’s quite an about face from the dramatic drop of 0.9% experienced in July. Year-on-year production may be set for a drop of 0.6%, after a modest rise of 0.1% in last month’s release. The Index of Services for August is flat at 0.4% rate over three months, the same as in July.
Implications for Monetary Policy
The information trend for the UK economy will be crucial as it feeds into market expectations around the trajectory of monetary policy and interest rates. Money markets are currently pricing in a 46-basis-point cut in interest rates by the Bank of England. This cut is projected to occur at the next four monetary policy meetings this year. If economic indicators are starting to paint a picture of continued economic growth, this could change – likely providing a bid under the GBPUSD.
The correlation between U.S. economic growth and GBP/USD price action today can be spotted in the past week’s trading behavior. As traders respond to news and predictions about the UK economy, volatility along the GBP/USD exchange rate is likely. A good performance in August would go a long way towards getting investor confidence back. This rise could prolong the uptrend for GBP/USD, particularly if it helps to alleviate fears of near-term BoE rate cuts.
Market Sentiment and Future Prospects
The overall mood for GBP/USD will likely stay firmly upbeat as investors continue to look at economic developments both at home and abroad. The immediate focus lies on whether GBP/USD can maintain its position above critical support levels while testing resistance at higher thresholds.
New economic indicators seem to be announced every day. Market participants are keeping an eye out for indications of more permanent expansion or recession that might begin to shift trading patterns. Should the UK economy demonstrate resilience in the coming months, it may have far-reaching effects on currency valuations and prime investment decisions.