The pound rose sharply against the yen yesterday after the data published by the UK Office for National Statistics indicated that the country had avoided a recession in Q3 2019, aided by services and construction. Additionally, the rally was triggered by Brexit party leader Nigel Farage’s decision to avoid contesting in any Parliamentary seats that will be defended by the UK Conservative Party.
The pound’s uptrend was also aided by an unexpected decline in Japanese core machinery orders in September. From a low of 139.365, the GBP/JPY pair rose to a high of 140.47 in the past 24 hours.
According to the UK statistical agency, the country’s GDP increased 0.3% q-o-q in the third quarter, after shrinking 0.2% in the June quarter. However, the pace of expansion did not meet economists’ estimate of 0.4%. Even the BoE had forecast the economy to grow by 0.4% in 3Q19. On annual basis, the economy grew 1%, the slowest rate since the 1Q 2010.
The services sector expanded 0.4%, led by the strong performance of information and communication division. Construction activities increased 0.6% in Q3, mainly due to an increase in private housing. Both manufacturing and production remained almost unchanged, while agriculture output shrank 0.2%.
GDP declined 0.1% m-o-m in September as industrial production contracted 0.3%, mainly reflecting the sluggishness in the pharmaceutical sector. Construction activities declined 0.2%, while the services output stood unchanged in September.
Furthermore, the total trade deficit was £6.40 billion in 3Q 2019, a decrease of £5 billion on q-o-q basis, mainly due to an increase in exports. Monthly, merchandize exports increased 1.2% in September. Imports increased 5.1%. The total trade deficit widened to £3.36 billion, from £1.76 billion in the earlier month.
Ruth Gregory, an economist at Capital Economics, anticipates the sluggishness to continue in 4Q 2019.Gregory further opined that Bank of England would be inclined to slash benchmark interest rates unless Brexit uncertainty ends and fiscal boost happens, implying income earners retain more post-tax income.
The UK also saw a major political development that sparked the pound’s rally. Farage, who leads the Brexit party, announced that the party would not fight in seats that were earlier held by Conservatives in the forthcoming election. Farage clarified that his party would contest in all other seats currently held by Labour and other pro-Remain groups.
The decision is widely seen as a big move in favor of the Conservatives, increasing Boris Johnson’s chance to improve his party’s overall tally in the election. A solid win will enable Johnson to easily push his version of Brexit agreement in Parliament. More importantly, the market is in favor of seeing a clear winner in the election.
The Japanese Cabinet Office stated that core machinery orders, a key indicator of private capital investment, dropped 2.9% m-o-m in September, following a 2.4% decline in the earlier month. It was the third successive decline in orders. Economists had anticipated orders to increase 0.9% during the reported period.
Sector-wise, manufacturing orders decreased 5.2%, while non-manufacturing orders increased 2.6%. In Q4, core orders are anticipated to increase 3.5%. According to Marcel Thieliant, an economist at Capital Economics, the sustained decline in machinery orders indicate that the strength seen in capital goods shipments will not last for a longer duration.
The economist predicts a 0.7% consecutive decline in business investment in Q4 2019. Investment growth is anticipated to decline to 1% next year from 1.8% in 2019.
Technically, the GBP/USD pair is rallying after consolidating at 139.50 levels since October 16th. The next major resistance is anticipated only at 146 levels. While the currency pair is trading above its 50-day moving average, the stochastic oscillator continues to remain in the bullish region. Therefore, we can anticipate the pound to rally further in the days ahead.
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