GBP/USD – UK in recession but that’s unlikely to sway the BoE yet

  • UK GDP -0.3% in Q4 and -0.1% in December
  • BoE not concerned about recession
  • GBPUSD momentum fading near February lows?

The UK fell into recession in the second half of last year after GDP figures for the fourth quarter showed a steeper contraction than expected.

While a recession was expected ahead of the release, the fourth quarter number was slightly worse despite December performing better than anticipated.

The UK has been flirting with recession for some time but despite the inevitable headlines, today’s data doesn’t change much. The economy isn’t growing, nor has it for the bulk of the last couple of years. It’s just on this occasion it’s tipped slightly the other way and recorded two small negative quarters of growth.

Not that flat growth is anything to celebrate, of course, but many feared it would be much worse when rates started rising and increased to the level they have. The economy, like those in many other countries, has shown significant resilience and is expected to bounce back this year.

The Bank of England obviously won’t be swayed by the technical recession, as Governor Bailey alluded to earlier this week, but weaker household spending may suggest demand isn’t as strong as they anticipated. We’ll get another update on that tomorrow from the January retail sales figures.

With inflation expected to fall to target in the second quarter, maybe even further after this week’s readings, the debate around rate cuts could intensify earlier than they would have otherwise thought. Slower wage growth would obviously help that along greatly.

Losing momentum already?

The pound has been drifting lower against the dollar this week on the back of the data but it’s yet to surpass the low from earlier this month.

GBPUSD Daily

Source – OANDA

That’s not to say it won’t and as we can see on the 4-hour chart below, the correction led to a rebound off the 61.8% Fibonacci retracement level following the topping formation breakout earlier in the month, looks to have been another bearish signal.

GBPUSD 4-Hour

What will be interesting is the momentum indicators as we approach those lows though as they already appear to be softening which could be a red flag.

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Craig Erlam

Craig Erlam

Former Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.