Stagnant UK economy pushes GBPUSD downward

21 February 2024 43
Stagnant UK economy pushes GBPUSD downward

The UK economy is sinking deeper into stagnation, with gross domestic product per capita falling for seven quarters in a row. This puts the government in a difficult position, as declines in the third and fourth quarters confirm that the economy is in recession.

The economic data of the last two weeks are rather gloomy. GDP dropped by 0.3% over the past three months of last year, following a 0.1% decline in the previous quarter. The economy grew by just 0.1% for the whole of 2023. Inflation remained at 4% in January, with core inflation also steady at 5.1%.

Food inflation slowed to 7% year-over-year from 8% previously. An even stronger signal comes from food producer prices, which have stopped rising. Bloomberg Economics expects overall inflation to drop below the 2% target this spring and continue to decline in the summer.

December's employment a nd wage data exceeded the Bank of England's February forecasts, but annual wage growth of 5.8% was down from 6.5% in November, indicating a strengthening downtrend. According to the KPMG/REC survey of private sector employment, the number of permanent employees declined at a sharp and accelerated pace. Wage growth is the weakest in three years.

Pressure is building on the UK central bank forcing it to admit the need for serious consideration of a looser monetary policy than its current official interest rate of 5.25%. Former Bank of England chief economist Andy Haldane told Sky News on Monday that he would have voted to cut interest rates at the end of last year. Real interest rates (adjusted for inflation at 4%) are the highest since before the Global Financial Crisis and will be much higher, worsening financial conditions even further.

Most economists expect rate cuts at the next BOE meeting in May. The central bank is also making statements that it will ease monetary conditions in the not-so-distant future.

From a technical point of view, GBPUSD has a level which acts as a magnet for its retest — 1.2310, and it is likely to be reached within the next two to three months.

The overall recommendation is to buy GBPUSD.

Profits should be taken at the level of 1.2310. A Stop-loss could be set at the level of 1.2800.

This content is for informational purposes only and is not intended to be investing advice.

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