Market Analysis

UK economy back in focus following shock monthly GDP contraction

The United Kingdom economy is coming back into focus following a shock -0.4 per cent GDP contraction during the month of April. The monthly UK GDP number was the worst since 2016, as Brexit turmoil caused the services, construction and industrial sectors inside the United Kingdom to stall dramatically. The GDP report highlighted the ongoing havoc that Brexit is causing to the UK economy, with the UK steel and car manufacturing industries amongst the worst affected.

The British pound tumbled well below the 1.2700 level against the U.S Dollar on the worse than expected monthly GDP reading as investors reacted negatively to the news. Today the UK economy releases more hard data, with wage earnings, unemployment, and employment under the microscope. The UK unemployment rate is expected to move higher to 3.9 per cent, which may in-part represent the recent job lay-offs seen in the British steel, retail and construction sectors.

The saving grace for sterling may be the UK earnings data, which is expected to show a gradual increase in average earnings inside the UK economy. However, if unemployment does start to trend higher it would almost certainly raise concerns for the Bank of England policymakers, as employment has constantly outperformed despite relatively weak PMI services and manufacturing readings this year.

The UK government issued a statement after the GDP release noting that UK fundamentals still remain robust, despite the sharp monthly GDP contraction. Other data points from the UK economy on Monday pointed to the opposite, with UK manufacturing output posting its biggest monthly drop since June 2002, while industrial output suffered its largest monthly drop since September 2012.


GBP/USD Daily Mountain Chart Source ActivTrader Platform

GBP/USD Daily Mountain Chart | Source: ActivTrader


With weakness also showing up in the U.S economy it is hard to gauge if sterling is currently undervalued, particularly given the likely occurrence of policy action from the FED next month. The key this week may be in the upcoming UK and U.S macroeconomic data releases and the financial markets reaction to these key numbers.

Key technical support for the GBP/USD pair is found at the 1.2660 and 1.2609 levels, while breakout support is found at the 1.2550 level. To the upside, major technical resistance is now found at the 1.2747 and 1.2761 levels, with extended resistance at 1.2817.


Written by Nathan Batchelor, External Analyst, ActivTrades

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