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Market Analysis: UK economy rebounds in November – how does that impact rate cut expectations?

By Daniela Hathorn

12:19, 12 January 2024

Financial Great Britain flag, united kingdom economy and european union flag Photo: Octus_Photography / Shutterstock

The UK economy recovered in November as evidenced by the 0.3% growth in GDP in the month. The reading came in higher than the 0.2% expected but it doesn’t remove the risk of a technical recession in the last quarter of 2023 as October saw a 0.3% contraction in GDP, following a marginal contraction in the third quarter.  Grant Fitzner, chief economist at the ONS, said the rebound in GDP had been “led by services with retail, car leasing and computer games companies all having a buoyant month”.

The upbeat data has kept the bullish momentum going in the pound but has failed to induce any significant moves. GBP/USD is slowly building higher in an attempt to gather the strength to break above 1.28. the pair has been showing good resilience in recent weeks despite the US dollar’s rebound on the back of markets unwinding some of the odds of a rate cut in March. Thursday’s stronger US CPI data has failed to reignite a bullish rally in USD as a deviation of the recent downtrend was already expected, and the prior stronger-than-forecasted US jobs data has already done its part in pricing out some of the rate cut expectations. Technically, GBP/USD has a good amount of support within its current uptrend so it seems likely that the bullish bias will remain in the short term. Increased resistance is likely to appear between 1.2792 and 1.2827.

GBP/USD daily chart

Past Performance is not a reliable indicator of future results.
  • Expectations regarding rate cuts continue to shift

In a similar fashion to what is happening in the US and the UK, the latest economic data seems to be causing more confusion than providing clarity. The market mentality around monetary policy shifted noticeably in the last quarter of 2023 as central banks started to acknowledge that their policies had become sufficiently restrictive and were working effectively to reduce inflation. At this point, all of the attention shifted towards attempting to decipher when each central bank would start cutting rates, and by how much. Growth and inflation had been softening conveniently over the past few months, feeding into the “rate cut rhetoric” meaning most market expectations were aligned. 

The chart below shows how the overnight swaps have changed since December 1st highlighting the shift in expectations towards a looser monetary policy starting this quarter.

US100

19,526.60 Price
-1.140% 1D Chg, %
Long position overnight fee -0.0263%
Short position overnight fee 0.0041%
Overnight fee time 21:00 (UTC)
Spread 7.0

XRP/USD

0.59 Price
-0.980% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 0.01168

BTC/USD

67,198.30 Price
-0.340% 1D Chg, %
Long position overnight fee -0.0616%
Short position overnight fee 0.0137%
Overnight fee time 21:00 (UTC)
Spread 106.00

ETH/USD

3,502.45 Price
-0.720% 1D Chg, %
Long position overnight fee -0.0616%
Short position overnight fee 0.0137%
Overnight fee time 21:00 (UTC)
Spread 6.00

GBPOIS current (blue line) vs 1st December (black line)

Source: refinitiv - Past Performance is not a reliable indicator of future results.

But the latest data across the US, UK and Eurozone has thrown a spanner in the works of the dovish hopefuls. This is not uncommon – after all, we know that economies hardly ever follow a straight line – but traders seem to be slightly unsure as to how to position themselves going forward.  Consumer prices have risen in December in both the euro area and the US, highlighting the non-linearity of the disinflation process. We’ll have to wait until next Wednesday to get the latest CPI reading in the UK, but so far data provided by Reuters suggests expectations are for the downward trend in consumer prices to continue in the UK, dropping from 3.9% in November to 3.8% in December. If so, the markets could start to price in higher chances of a rate cut in March from the BoE, which could weigh on the pound as it worsens its carry trade potential. Regardless, markets will likely be cautious until further insight from BoE speakers can be obtained.  

 

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
Capital Com is an execution-only service provider. The material provided in this article is for information purposes only and should not be understood as investment advice. Any opinion that may be provided on this page does not constitute a recommendation by Capital Com or its agents and has not been prepared in accordance with the legal requirements designed to promote investment research independence. While the information in this communication, or on which this communication is based, has been obtained from sources that Capital.com believes to be reliable and accurate, it has not undergone independent verification. No representation or warranty, whether expressed or implied, is made as to the accuracy or completeness of any information obtained from third parties. If you rely on the information on this page, then you do so entirely at your own risk.

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