UK Growth Drops Sharply

The British Pound has come under renewed selling pressure into the middle of the week as traders digest the latest set of UK growth figures. According to the ONS, the UK economy shrank by 0.5% in July. This was deeper than the 0.2% dip the market was looking for and marks a stark shift from the prior month’s 0.5% gain in output. Indeed, July’s reading marks the lowest UK growth output since December 2022. With unemployment rising, wages still growing and the overall economy contracting, the BOE is facing a very tricky set of conditions ahead of the upcoming September MPR.

BOE Rate Cuts on The Horizon

Ahead of the BOE meeting later this month, traders are broadly expecting the bank to hike by a further .25%, though this might well prove to be the final hike for now. With economic headwinds growing (NIESR forecasts 60% risk of a UK recession in 2024), the BOE is expected to signal a less aggressive approach. If confirmed, this should keep GBP under pressure near-term as focus shifts towards anticipating the first BOE rate cut next year. As such, GBP looks vulnerable to further downside on any further data weakness ahead of the BOE meeting. GBPCAD is an interesting pair to watch in terms of GBP downside given the current strength we’re seeing in oil prices, supporting CAD.

Technical Views

GBPCAD

The sell off from the 1.7309 level highs has seen the market breaking down below the 1.7129 level as well as the rising trend line. Price is now testing the 1.6848 level support with risks pointed towards a potential break lower, targeting 1.6538 thereafter, in line with bearish momentum studies readings.