GBP/USD pares back gains as UK GDP drops

The latest data shows UK growth slowed in the third quarter. The figures released this morning show the UK economy grew 0.1% in Q3, below market expectations and a significant slowdown from Q2 at 5%. Meanwhile, the year-over-year change showed a stronger reading than expected, as the UK economy grew 1% from the same time last year. 

However, focusing more on short-term growth shows weakness in the UK economy. Monthly GDP growth for September has shrunk for the first time since December last year, coming in at -0.1%. Other data in the UK showed persistent weakness in industrial production and manufacturing production, both indicators underperforming estimates. 

The data so far has failed to see significant reaction in the Pound. At their latest meeting, The Bank of England said that it expects the Labour Government’s tax-raising budget to boost GDP by 0.75 percentage points in a year’s time., so markets could be focused on what’s to come despite the weaker reading this month. The pound has seen some mild selling pressure throughout the morning, with increased focus in EUR/GBP.

GBP/USD daily chart

Past performance is not a reliable indicator of future results.

With regards to GBP/USD, the pair has attempted to reverse higher prior to the GDP release but has lost its ground. The focus has been solely on the dollar side of the trade for the past few weeks and the resurgence of the Trump effect following the elections has caused GBP/USD to pull back to a four-month low. The daily chart is starting to show signs of being oversold but the lack of follow-through in Friday’s attempted reversal shows a lack of conviction to be a buyer right now, mostly because that implies selling the dollar at a time when it seems hard to imagine a reversal in its strength. 

That said, the odds of a December rate cut from the Bank of England have dropped significantly and now stand at 18%. Meanwhile, market odds show a 63% chance of another 25 bps cut from the Federal Reserve in December, despite Trump’s inflationary election promises. As rate differentials continue to drive some of the momentum in FX pairs, we could see GBP/USD recovering some strength over the coming weeks if evidence backs up this BOE hold/FED cut scenario.