Sterling came under pressure in mid-week trading after data showed an unexpectedly sharp drop in British economic growth in July. Accordingly, losses have increased in the price of the GBP/USD currency pair, reaching its lowest support level of 1.2434 in three months. It settled around the 1.2490 level at the beginning of today's session, Thursday.
Last night The Office for National Statistics reported that UK GDP fell by a large -0.5% in the month to July, well above the consensus estimate of -0.2% and representing a sharp slowdown from June's 0.5% growth. This decrease is largely due to the unusually rainy July and strikes in the public sector. British economic growth in the year to June was flat at 0%, worse than the consensus estimate of 0.4% and down from the previous month's growth of 0.9%. But gross domestic product rose by 0.2% in the three months to July 2023, with growth announced in all three main sectors.
The data sends a warning signal that the UK economy may be entering a period of stagflation where high inflation is paired with low growth. It also bolsters expectations that the Bank of England will raise interest rates for the last time on September 21, betting that inflation will fall sharply due to a weak economy that has not yet seen the full force of previous rate hikes.
These expectations put downward pressure on British bond yields which in turn leads to pressure on the performance of the sterling pound.
The Office for National Statistics adds that the services sector was the main source of weakness as output fell by 0.5% in July, after growing by 0.2% in June 2023. The strike by NHS doctors means that the health services sector was the biggest drag on the wider services sector. The GDP report comes after the labor report released on Tuesday, which revealed that unemployment in Britain began to accelerate with the unemployment rate rising to its highest level in two years. Commenting on that, Mathias van der Jugt, the analyst at KBC Markets, says: "This reinforces the inflationary stagnation in the United Kingdom, where the Bank of England will soon err on the pessimistic side of expectations."
As for Samuel Toombs, chief UK economist at Pantheon Macroeconomics, he is more optimistic, saying that the July numbers do not mean there is a major shift for the worse. We doubt that the month-on-month decline in GDP represents the start of a downward trend, as it can arguably be attributed to one-off developments. First of all, the sharp drop in output in the health and education sectors marked the beginning of a downward trend which deducted a combined 0.24 basis points from the monthly growth in GDP, as the result of the strikes.
Technical analysis of the sterling pair against the dollar:
- The GBP/USD exchange rate has been in a strong downtrend for the past few months.
- It formed a descending channel and remained below the 25-day and 50-day moving averages.
- The price moved below the important resistance level of 1.2550, which is the high point on September 11.
- It also fell below the 23.6% correction level.
The expectations for the currency pair are bearish, and the next target is the 1.2300 support. This opinion is also supported by the rise in the price of Brent crude, which jumped to $92.4.
The Sterling Dollar currency pair will be affected today by investor sentiment on the European Central Bank's announcement and the reaction to the results of American economic data, led by the reading of the producer price index, US retail sales, and the number of weekly jobless claims.
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